THE issue before the Bench is - Whether when assesse's business is not restricted to only financing and treats re-possessed vehicles as stock-in-trade, any loss arising out of re-sale of such vehciles is to be construed as revenue loss. YES is the answer.
Facts of the case
A) The assessee is non-banking finance company engaged in the business of leasing, hire purchase and finance of vehicles. During the concerned year, the total receipts were Rs.29.05 crore as against Rs.70.03 crores in preceding year. As per the P&L A/c, there was a loss of Rs.6.79 crores as against loss of Rs.37.37 crore in preceding year. At the time of filing of return, the assessee had 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 AO took the view that in light of the decision of Allahabad High Court in the case of Motor and General Sales Pvt. Ltd. Vs. CIT and for the reasons given in the assessment order of A.Y 1995-96, the loss on repossessed hire-purchase assets was not allowable as deduction because it was basically of the nature of capital loss.
On appeal, the CIT(A) held that the real business of the company was 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 resale was a part of its regular business activity. The trading profits of the company were enmeshed in the entire transaction that may be spread over a few years. Since the profits were enmeshed in the overall transaction, the re-possession and re-sale was also an integral part of the transaction. Consequently, any loss or profit on re-possession or re-sale would 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 AO to treat the said loss as a revenue loss in respect of the repossessed vehicles that have been re-sold.
B) The assessee during the concerned year is also engaged in bills discounting activity, dealing in all kinds of securities including shares, the debentures, commercial papers, Government Securities. The AO observed that in its P&L account, loss on sale of investment amounting to Rs.1,23,33,239/- had been claimed by the assessee. The assessee’s investment constitute capital asset, therefore, any loss on account of sale of capital asset could not be claimed as a deduction in the P&L A/c. The AO further held that loss which had arisen was 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. On appeal, the 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.
Having heard the parties, the Tribunal held that,
Loss on re-sale of re-possessed vehicles
++ 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 are treated as stock-in-trade throughout the earlier years and the same was accepted by the Department in the earlier years. Thus CIT(A) has taken a correct view and directed the AO to treat the said loss as revenue loss. In light of this, the AO is directed to treat the said loss as a revenue loss in respect of the re-possessed vehicles that have been resold;
Loss on sale of shares
++ it can be seen that the contentions of the DR in respect of Section 73 cannot be sustained as the same stand was not taken by the AO while passing the assessment order and the said plea was not raised before the CIT(A) as well. The Supreme Court in case of Cocanada Radheswami Bank Ltd. 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.