Loss on Sale of Foreign Cars used in the Business of Assessee is ‘Business Loss’: Madras HC [Read Judgment]

Madras High Court

The division bench of the Madras High Court comprising of Justice Huluvadi G Ramesh and Justice Anita Sumant, in the case of K.D Madan v. ITO, held that the loss on sale of foreign Cars used in the business of the assessee can be categorized as “Business Loss” under the provisions of the Income Tax Act.

The assessee a shipping agent, sold motor cars at a cumulative loss of Rs.51,6,108/- and claimed the same as business loss. While rejecting the claim, the AO observed that the loss arising on the sale of foreign cars is capital in nature which is liable to be set off only against capital gains under section 50 of the Income Tax Act.

Challenging the above order, assessee urged that the provisions of sub-clause (iii) of Section 32(1) permitted a write off of the loss arising from the sale of the foreign cars to the extent to which such sale consideration falls short of the written down value of the asset.

Though the first appellate authority held in favour of the assessee, the Tribunal reversed the said order by holding that the same cannot be treated as business loss since the assessee is not a dealer in foreign cars.

The bench noticed that the above decision of the Tribunal was without considering the fact that the use of the cars in its business by the assessee has been found as a fact by the CIT (A) and attained finality.

Rejecting the arguments of the Revenue, the two-judge bench bench observed that s. 50 would not be applicable to the present case since the foreign cars do not form part of a block of assets and have not been granted depreciation in so far as depreciation was not allowable in respect of foreign cars for the relevant period.

Analyzing the provisions of section 32(1)(iii), the bench said that the provision is applicable to the assets in question, being foreign cars used in the business of the assessee. “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 under section 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.”

In view of the specific finding of the first appellate authority 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.

Read the full text of the Judgment below.

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