Income Tax Appellate Tribunal - Ahmedabad
Patel Brass Works vs Assistant Commissioner Of Income-Tax on 28 February, 1994
Equivalent citations: [1994]50ITD322(AHD)
ORDER
B.L. Chhibber, Accountant Member
1. In this appeal by the assessee two grounds have been raised. Ground No. 1 reads as under :
The learned CIT (Appeals) erred in disallowing the claim of loss of Rs. 80,000.
2. The assessee, a firm, is engaged in the business of manufacturing diesel Oil engine spare parts. It filed the return of income on 20-6-1986 showing income at Rs. 4,11,610. In the profit and loss account the assessee-firm debited an amount of Rs. 80,000 as capital loss on machinery. On enquiry the ACIT found that the assessee had placed an order for purchase of machinery worth Rs. 10,09,000 with M/s. Godrej & Boyce Mfg. Co. (P.) Ltd., at Bombay vide letter dated 17-7-1984. The said order was confirmed by the suppliers vide their letter dated 24-7-1984. The assessee was required to pay earnest money of Rs. 1,16,000 for confirmation of the order which was accordingly paid by the assessee. According to the terms of the order, the machinery was to be supplied in a period of 12 months. It appears that subsequently the assessee dropped its expansion plan and obviously the order for supply of machinery was cancelled as per telex message dated 18-4-1985. The assessee requested for return of advance payment of Rs. 1,16,000 for which the assessee entered into correspondence with the said suppliers. However the suppliers did not agree and finally intimated that they would deduct Rs. 80,000 as cancellation charges and refund the balance of amount which was accordingly refunded by them. The assessee claimed the cancellation charges of Rs. 80,000 as business loss or short-term capital loss. The ACIT held that it was neither a business loss nor a short-term capital loss. While negativing the assessee's claim for short-term capital loss in view of Section 71 (3), the ACIT took the view that there is no transfer of any capital asset which could give rise to short term capital loss. In the opinion of the learned ACIT in the absence of capital asset and transfer thereof, the question of computing the short-term capital loss and allowing deduction thereof under Section 71(3) did not arise. For this proposition, the ACIT placed reliance on the decision of Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT [1967] 63 ITR 65 as well as on the decision of Punjab & Haryana High Court in the case of Dalmia Dadri Cement Ltd. v. CIT [1973] 90 ITR 297. As such the loss claimed by the assessee at Rs. 80,000 was disallowed by the ACIT.
3. On appeal the learned CIT (Appeals) confirmed the action of the learned ACIT.
4. Shri D.V. Lalchandani, advocate appearing for the assessee submitted that both the authorities below have erred in disallowing the loss of Rs. 80,000. According to the learned Counsel it ought to have been allowed as business loss as it was incurred during the normal course of business. Alternatively, he argued that it was a capital loss and ought to have been allowed under Section 71 (3) of the Act. The learned Counsel submitted that by advancing a sum of Rs. 1,16,000 to M/s. Godrej & Boyce Mfg. Co. (P.) Ltd. for the purchase of machinery, the assessee had got a right to acquire a capital asset and the extinguishment of such a right resulted into capital loss. According to the learned Counsel a capital asset is nothing but a bundle of rights and the learned authorities below erred in holding that the assessee did not get any right to acquire a capital asset. In support of his contention the learned Counsel relied upon Ahmed G.H. Ariff v. CWT [1970] 76 ITR 471 (SC), CIT v. Tata Services Ltd. [1980] 122 ITR 594 and CIT v. Vania Silk Mills (P.) Ltd. [1977] 107 ITR 300 (Guj.).
5. Shri P.N. Dixit, the learned D.R. submitted that no doubt the assessee did advance a sum of Rs. 1,16,000 to M/s. Godrej & Boyce Mfg. Co. Pvt. Ltd. for the purchase of machinery - a capital asset, but the asset never came into existence and after the cancellation of the order the right to acquire the asset did not exist. He further submitted that no capital asset came into existence at any stage and there was only a contractual obligation on the part of the supplier. According to the learned D.R. the amount of Rs. 80,000 was a pure and simple capital loss not connected with the carrying on of business and is accordingly not allowable under the Act.
6. We have considered the rival submissions and perused the facts on record and have also gone through the decisions relied upon by the learned counsel of the assessee and those cited by the authorities below in their respective orders. In our opinion the assessee is not entitled to deduction of the sum of Rs. 80,000 either as revenue/business loss or even capital loss as per the provisions of Section 71 (3) of the Act. By the acceptance of the offer by Godrej Co. through its letter dated 24-7-1984 a contract came into existence between the assessee and Godrej Co. which gave right to the assessee to enforce its rights against the Godrej Co. for supply of machinery as per order placed by the assessee through its letter dated 17-7-1984. Thus this resulted contract did not create any interest in the property namely machinery which the Godrej Co. agreed to fabricate and assemble by various parts, components and machineries. It therefore cannot be gain said that the contract with the Godrej Co. brought into existence any property which can be termed as capital asset as defined in Section 2(14) of the IT Act, 1961. Loss under the head 'capital gains' either long term or short term can be claimed if there is a transfer of a capital asset. As stated by us above the contract between the assessee and Godrej Co. did not create any interest in or over the property but only gave a right to the assessee-company to enforce against the Godrej Co. and vice versa. Since such a contract is not capital asset as has rightly been held by the Assessing Officer there cannot be any loss arising to the assessee on its transfer if so. Assuming for a while that such contract was a capital asset yet in our view there has been no transfer as defined in Section 2(47) of the Act. Though no doubt one of the ingredients of the definition of transfer in Section 2(47) is extinguishment of any rights by virtue of revocation, but cancellation of the order unilaterally by the assessee cannot amount to or be construed as extinguishment of rights. What the assessee suo motu and voluntarily did through its telex message dated 18-4-1985 was surrender of the right which it possessed under the concluded contract and this unilateral or self-created surrender cannot amount to extinguishment of right as intended by the Legislature in enacting the definition provision of transfer in Section 2(47). We are therefore of the firm opinion that the concluded contract between the assessee and Godrej Co. through exchange of letters was not a capital asset in the hands of the assessee and there was no transfer whatsoever within the meaning of Section 2(47) of the IT Act, 1961. That being the case the assessee-firm is not entitled to the set off of loss of Rs. 80,000 as loss under the head 'capital gains' in terms of the provisions of Section 71(3) of the Act. We agree with the Assessing Officer in this regard. Now let us deal with the case of the assessee whether it is a revenue or business loss. As per the provisions of Section 29 of the Act 1961 profits and gains of business or profession are to be computed in the manner laid down in Sections 30 to 43D of the Income-tax Act, 1961. We do not find any specific provision from Sections 28 to 43D which could enable or entitle the assessee to claim the said loss of Rs. 80,000 viz., cancellation charges or damages deducted by the Godrej Co. There is a residuary provision contained in Section 37 of the Act which enables the assessee to claim by way of deduction in respect of expenditure incurred wholly and exclusively for the purpose of business. It is not the normal incident of the assessee to enter into contracts and then cancel the contract and surrender its right and claim the cancellation charges or the damages on the revocation of the contract as a business expenditure. Certainly this is not the business of the assessee. Such a loss no doubt has occasioned to the assessee but in our view the same cannot be considered as a business loss to be allowed or claimed in accordance with the residuary provisions of Section 37 of the IT Act, 1961. The assessee has not satisfied the conditions laid down even under the said residuary provision namely Section 37 of the IT Act, and it is therefore not eligible for set off of deduction of the said loss of Rs. 80,000 in arriving at the taxable income or the profits for the year under appeal. We are therefore of the view that the Assessing Officer is justified in holding that the assessee was not entitled to the deduction of the said sum of Rs. 80,000 even as a business loss.
7. We have carefully studied the various decisions relied upon by the assessee's counsel with reference to the provisions of Section 2(14) as well as Section 2(47) of the Act but we find that none of the decisions can come to the rescue of the assessee in the present appeal. In the case decided by the Supreme Court in Ahmed G.H. Ariff's case (supra), the Hon'ble Supreme Court considered the meaning of property and meaning of Wakf-alal-Aulad, and held that the property is a term of the widest import and, subject to any limitation which the context may require, it signifies every possible interest which a person can clearly hold and enjoy. In that case the Hon'ble Supreme Court was concerned with the meaning of annuity in Wealth-tax Act, 1957. Thus it will be seen that on the facts of the case the abovementioned case has no relevance to the facts of the case under consideration. In the case of Tata Services Ltd. (supra) the Hon'ble Bombay High Court considered the meaning of the capital asset as well as transfer, and held that right to obtain conveyance of the immovable property is a capital asset and assignment is a transfer. Since the case decided by the Hon'ble Bombay High Court is in connection with the assignment of the right, we are of the opinion that the facts are distinguishable from the facts of the case before us. The case, of Vania Silk Mills (P.) Ltd. (supra) decided by the Gujarat High Court stands reversed by the Supreme Court in Vania Silk Mills (P.) Ltd. v. CIT [1991] 191 ITR 647. Reversing the decision of the High Court, the Apex Court held that capital gains was attracted under Section 45 by transfer and not merely by extinguishment of rights howsoever brought about; whatever the mode by which the transfer was brought about, the existence of the asset during the process of transfer was a precondition; unless the asset existed in fact, there could not be a transfer of it. The Hon'ble Supreme Court further held that since associated words and expressions like "sale", "exchange", etc., used in the definition of "transfer" in Section 2(47), imply the existence of the asset and of the transferee according to the rule of noscitur, the expression "extinguishment of any rights" would take colour from those associated words and expressions and will have to be restricted to the sense analogous to them. If the Legislature had intended to extend the definition to any extinguishment of right, it would not have included the obvious instances of transfer, viz. sale, exchange etc. Hence the expression "extinguishment of any rights therein" will have to be confined to the extinguishment of rights on account of transfer and cannot be extended to mean any extinguishment of right independent of or otherwise than on account of transfer.
8. In the light of above discussion, we uphold the impugned order of the learned CIT (Appeals).
9. Ground No. 2 reads as under :
The learned CIT (Appeals) erred in upholding the disallowance of Rs. 8,212 on account of sales tax liabilities under Section 43B of the Act. At the time of hearing the learned counsel did not press this ground. The same is accordingly dismissed.
10. In the result, the appeal is dismissed.