Loss on sale of foreign cars was business loss not capital loss u/s 50 – High Court

Loss on sale of foreign cars held as business loss not capital loss u/s 50 as the imported cars did not form part of block of assets and depreciation was not allowable – High Court

ABCAUS Case Law Citation:
ABCAUS 2026 (2017) (08) HC

Assessment Year :  1999-00 and 2000-01

Important Case Laws Cited/relied upon by the parties:
Guindy Machine Tools Private Limtied, Vs. Commissioner of Income Tax (254 ITR 780)

Brief Facts of the Case:

The appellant assessee was an individual carrying on business as a shipping agent. In the relevant financial years he sold foreign motor cars at a cumulative loss of Rs.51,6,108/-.

In the course of assessment, the Assessing Officer(AO) took the view that the loss would be ‘capital’ in nature liable to be set off only against capital gains under the provisions of section 50 of the Income Tax Act, 1961 (the Act). On the other hand, the stand of the assessee was to the effect that the loss was ‘business’ in nature, liable to be set off against business profits.  

The assessee sought the benefit of the provisions of section 32(1)(iii) of the Act. 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 the foreign cars to the extent to which such sale consideration falls short of the written down value (in short ‘WDV’) of the asset.

The AO did not agree with the said contention and applied the provisions of section 50 of the Act concluding that the loss arising from the sale of foreign cars was a capital loss.

An appeal was filed by the assessee before the Commissioner of Income Tax (Appeals) (CIT(A)) The arguments of the assessee were to the effect that no depreciation was provided for foreign cars for the relevant period and the written down value thus ought to be taken to be the cost of acquisition. The CIT(A) refered to the definition of ‘written down value’ (WDV) in section 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. The CIT(A) concluded that section 50 of the Act was not applicable to the transaction in question. The appeal was allowed on the basis that the invocation of the provisions of section 50 of the Act by the assessing officer to the transaction in question was erroneous.

The order of the CIT(A) was reversed by the Tribunal by holding that the loss cannot be treated as a business loss in view of the fact that the assessee was not a dealer in foreign cars.

Observations made by the High Court:

The Hon’ble High Court noted that the definition of ‘Plant’ in Section 43(3) includes ‘vehicles’ and it was established as a fact before the CIT(A) that the foreign cars were indeed used in the business of the assessee during the relevant period. This finding of fact was not challenged by the Revenue before the Income Tax Appellate Tribunal (ITAT). The ITAT also failed to note that the use of the cars in its business by the assessee had been found as a fact by the CIT (A) and attained finality.

The Hon’ble High Court 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 did not form part of a block of assets and, admittedly, had 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 were thus inapplicable to the present case.

The Hon’ble High Court examined the provisions of section 32(1)(iii). The relevant clause was inserted by Finance Act 1998, effective 1.4.1998. The provision was applicable to the assets in question, being foreign cars used in the business of the assessee in terms of section 32 (1)(i) of the Act. The assessee sold the foreign cars and the sale consideration resulted in a loss which had 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. Also, 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.

Held:
In view of the categorical finding of the CIT(A) that the foreign cars were utilized in the business of the assessee, the loss arising out of their sale was held liable to be categorized as a business loss.