M/S.share Aids Private Ltd.,New v. The Income Tax Officer (Osd),Company Circle Vi (2), Aayakar Bhavan, New Block

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED: 1.12.2020 CORAMTHE HON'BLE DR.JUSTICE VINEET KOTHARIANDTHE HON'BLE MR.JUSTICE M.S.RAMESHTax Case (Appeal) No.381 of 2009 M/s.Share Aids Private Ltd.,New No.14, Old No.120,P.S.Sivasamy Salai, Mylapore, Chennai 600 004. Appellant Vs. The Income Tax Officer (OSD),Company Circle VI (2), Aayakar Bhavan, New Block,121, Nungambakkam High Road,Chennai 600 034. Respondent Tax Case (Appeal) filed under Section 260A of the IncomeTax Act, 1961 against the order of the Income Tax AppellateTribunal, 'D' Bench, Chennai, dated 26.12.2008 made in ITANo.649/Mds/2008 for the Assessment Year 2001-02 against theorder of the Commissioner of Income-Tax(Appeal-IX Chennaidated 24.01.2008 and made in ITA.No.468/05-06 for theassessment year 2001-02. against the order of the Income tax officer(OSD), CompanyCircleVI(2)Chennaidt.02.01.2006andmadeinPAN/GIR.AAACS9352A, GIR No.SH69 of the Assessment Year 2001-02. For Appellant : Ms.Madhupreetha Elango This Tax Case Appeal has been filed by M/s.Share AidsPrivate Limited, who was acting as Share Transfer Agents andRegistrars, raising the following substantial questions of lawfrom the order of the learned Tribunal dated 26.12.2008 forthe Assessment Year 2001-2002 by which the Revenue's Appealwas allowed by the learned Tribunal. https://hcservices.ecourts.gov.in/hcservices/ 2. The Tax Case Appeal was admitted on the followingquestions of law:-"i) Whether under the facts and circumstances ofthe case the assessee is entitled to invokeSection 41(2) of the Income Tax Act, 1961 tocalculate the loss on sale of asset and claimthe same as the business loss incurred andreflect the same in the assessee‘s Income Taxreturns?ii) Whether depreciation can be claimed oncapital assets and whether provisions of Section50 of the Act will apply to the currentsituation when there are no other assets in theblock except those sold?iii) Whether the ITO is entitled to partlyaccept expenditure and disallow the balancewithout assigning any reasons for either of thesame?"3. The relevant findings of the learned Tribunal withregard to the aforesaid two questions as given in para 2.6 to3.3 till are extracted hereunder for ready reference:-"2.6 From a plain reading of the Section, it isclear that Section 41(2) is applicable onlywhere the sale value along with scrap valueexceeds the written down value. In such case,Section 41(2) mandates that realized value tothe extent represented by cost and WDV of theasset should be charged to income as ‘businessincome’. In the present case, the sale valuerealized is less than the written down value. Sothere is no question of any treatment as perSection 41(2). In this case, the assets involvedare capital assets on which depreciation hasbeen claimed. The sale price realized is lessthan the written down value of the respectiveblock of assets after all depreciable assetswere sold. Under the circumstances, resultingloss has to be treated as loss arising fromtransfer of short term capital asset as perprovisions of Section 50 of the Income Tax Act.It is settled law that when the language of theAct is plain and unambiguous, there is no scopeof bringing any interpolation therein. Hence,the order of the learned Commissioner of IncomeTax (Appeals) is set aside on this issue.3. The next issue raised is that theCommissioner of Income Tax (Appeals) erred indeleting the addition of Rs.3,56,949/- byobserving that Assessing Officer has not givenany information as to whether the expenditure was genuine or not.3.1 On this issue the Assessing Officer notedthat assessee has claimed an expenditure ofRs.3,56,949/- under the head “Recovery". TheAssessing Officer disallowed the same byobserving as under: was genuine or not.3.1 On this issue the Assessing Officer notedthat assessee has claimed an expenditure ofRs.3,56,949/- under the head “Recovery". TheAssessing Officer disallowed the same byobserving as under: "The assessee stated that it incurredexpenditure on account of postage,stationery, courier charges, etc., thecost of which are recovered from thevarious clients. The assessee statedthat as per the SEBI directions, changeof address was to be communicated tothe individual investors both byadvertisement in prominent newspapersand also by individual communications.The assessee also stated that due toclosure of the business in 2000,efforts were made to recover all theexpenses and fee payable before thehanding over the records. However, itcould not recover the expenses incurredand that the assessee’s claimrepresented the amount spent by it butcould not be recovered. The assesseedid not produce any details regardingthe expenditure incurred and amountrecovered. No evidence was alsoproduced to prove that it has incurredthe above loss." 3.2 Upon assessee's appeal the learnedCommissioner of Income Tax (Appeals) held thatsince ‘Recovery’ is an expenditure and AssessingOfficer has not given his opinion as to whetherit was genuine or not and if he has treated apart of the expenditure as genuine, the otherpart cannot be disallowed. Hence he directed fordeletion of this addition. 3.3 We have heard both the counsels and perusedthe relevant records. We find that the learnedCommissioner of Income Tax (Appeals) has given avery strange reason for deleting this addition.It is quite apparent from the assessment orderthat no evidence whatsoever was produced beforethe Assessing Officer regarding the details ofthis expenditure. De hors production of anyevidence, Assessing Officer could not have goneinto the veracity of this expenditure. Under thecircumstances, we set aside the order of thelearned Commissioner of Income Tax (Appeals) andrestore that of Assessing Officer on this issue." 4. The learned counsel for the Appellant/AssesseeMs.Madhupreetha Elango submitted that the if a loss is causedon the sale of the Capital Assets by the Assessee, the sameshould be allowed as Business Expenditure under Section 41(2)of the Act as it cannot be brought to tax under Section 50 ofthe Income Tax Act as held by the learned Tribunal. Shesubmitted that the Assessee Company was in loss and was lateron wound up and in the process of winding up, it not only soldsome of its Assets on which depreciation was claimed by itunder Section 32 of the Act and suffered losses thereon as thesame was sold below the written off value of those assets inthe Books of Accounts and therefore, such loss was clearlyallowable as a Business Loss in the hands of the Assessee. Shealso drew the attention of the court to Section 70 of the Actto support her contention. undertakingengagedingeneration,orgeneration and distribution of power. Regardingthe other assets only Section 50 is applicable,which is a specific section for computation ofcapital gains in case of depreciable assets.The assessee’s claim that what is sold is not acapital asset is also not acceptable. Hence,the Assessing Officer did not accept theassessee’s plea that the loss should be allowedu/5 41(2)." undertakingengagedingeneration,orgeneration and distribution of power. Regardingthe other assets only Section 50 is applicable,which is a specific section for computation ofcapital gains in case of depreciable assets.The assessee’s claim that what is sold is not acapital asset is also not acceptable. Hence,the Assessing Officer did not accept theassessee’s plea that the loss should be allowedu/5 41(2)." 6. On the other issue involved in the present case withregard to recovery of the expenditure like Postage, CourierCharges etc., from the clients of the Assessee Company, thetotal expenditure incurred by the Assessee during the year inquestion was more and recovery from the clients was less andthus, the net ‘Unrecovered’ amount to the extent ofRs.3,56,949/- was claimed as expenditure under the head“Recovery”. The Assessee claimed that this was the expensesincurred for Postage, Courier, Stationery etc., to comply withthe guidelines of SEBI to inform the change of address to theindividual investors both by advertisement in prominentnewspapers and also by individual communications. But, sincethere was closure of business in the year 2000, the relevantto Assessment Year 2001-2002, only a part of expenses could berecovered from the clients and the balance amount was claimedas 'Business Expenditure' which was disallowed by the learnedTribunal. 7. The learned counsel for the Appellant/Assesseesubmitted that it was a Business Expenditure in the regularcourse of business of the Assess at the relevant point of timeduring the previous year and therefore, the same could not bedisallowed by the Assessing Authority as well as the learnedTribunal. As the Assessee had duly furnished its auditedBalance Sheet before the Assessing Authority and thus theentire expenditure was duly verified by the Auditors as wellas Books of Accounts maintained in the regular course ofbusiness. 8. Per contra, the learned counsel for the RevenueMr.J.Narayanasamy, learned Senior Standing Counsel supportedthe impugned order of the learned Tribunal . 9. We have heard the learned counsel for the parties atlength and perused the relevant records. The relevantprovisions of Section 41(2), Section 50 and Section 70 totheir relevant extent are quoted below for ready reference:-"Profits chargeable to tax. 41(1) Where an allowance or deduction has beenmade in the assessment for any year in respect https://hcservices.ecourts.gov.in/hcservices/ of loss, expenditure or trading liabilityincurred by the assessee (hereinafter referredto as the first-mentioned person) andsubsequently during any previous year, .... .... .... (2) Where any building, machinery, plant orfurniture,-- (a) which is owned by the assessee; (b) in respect of which depreciation isclaimed under clause (i) of subsection (1) ofsection 32; and(c) which was or has been used for thepurposes of business,is sold, discarded, demolished or destroyed"and the moneys payable" in respect of suchbuilding, machinery, plant or furniture, asthe case may be, together with the amount ofscrap value, if any, exceeds the written downvalue, so much of the excess as does notexceed the difference between the actual costand the written down value shall be chargeableto income-tax as income of the business of theprevious year in which the moneys payable forthe building, machinery, plant or furniturebecame due”.Explanation.--Where the moneys payable inrespect of the building, machinery, plant orfurniture referred to in this sub-sectionbecome due in a previous year in which thebusiness for the purpose of which thebuilding, machinery, plant or furniture wasbeing used is no longer in existence, theprovision of this sub-section shall apply asif the business is in existence in thatprevious year." "Special provision for computation of capitalgains in case of depreciable assets.50. Notwithstanding anything contained inclause (42A) of section 2, where the capitalasset is an asset forming part of a block ofassets in respect of which depreciation hasbeen allowed under this Act or under theIndian Income tax Act, 1922 (11 of 1922), theprovisions of sections 48 and 49 shall besubject to the following modifications :-(1) where the full value of the considerationreceived or accruing as a result of thetransfer of the asset together with the fullvalue of such consideration received or accruing as a result of the transfer of anyother capital asset falling within the blockof the assets during the previous year,exceeds the aggregate of the followingamounts, namely:--(i)expenditureincurredwhollyandexclusively in connection with such transferor transfers;(ii) the written down value of the block ofassets at the beginning of the previous year;and(iii) the actual cost of any asset fallingwithin the block of assets acquired during theprevious year,such excess shall be deemed to be the capitalgains arising from the transfer of short-termcapital assets;(2) where any block of assets ceases to existas such, for the reason that all the assets inthat block are transferred during the previousyear, the cost of acquisition of the block ofassets shall be the written down value of theblock of assets at the beginning of theprevious year, as increased by the actual costof any asset falling within that block ofassets, acquired by the assessee during theprevious year and the income received oraccruing as a result of such transfer ortransfers shall be deemed to be the capitalgains arising from the transfer of short-termcapital assets."Set off of loss from one source againstIncome from another source under the same headof income. 70(1) Save as otherwise provided in this Act,where the net result for any assessment yearin respect of any source falling under anyhead of income, other than “Capital gains”, isa loss, the assessee shall be entitled to havethe amount of such loss set off against hisincome from any other source under the samehead." 10. From the aforesaid Scheme of Provisions of the Actand the argument of the learned counsel for the Assessee, weare satisfied that the learned Tribunal has erred indisallowing the loss suffered by the Assessee on the sale ofthe Assets on which it claimed depreciation under Section 32of the Act. https://hcservices.ecourts.gov.in/hcservices/ 11. Section 41(2) falls under Part D of Chapter IV whichprovides for 'Computation of Total Income' . The provisionsunder Section 28 to 44DB of the Act are relating to'Computation of Profits and Gains of Business or Profession'.Part D of the said Chapter deals with Capital Gains andSections 45 to 55A deals with 'Capital Gains'. Though boththese provisions talk of only deemed income and deemed CapitalGains where depreciable assets are sold by the Assessee, theydo not clearly spell out the treatment of loss occurring atthe stage of sale of such depreciated assets. We are of theopinion that even if these provisions talk only of taxabilityon the excess received by the Assessee over the written downvalue of the assets, it cannot exclude or ignore the minusfigure or loss occurring on such sale transactions. 12. In our opinion, since the sale of those Assets of theBlock of Assets, not being immovable property of the Assessee,were sold during the regular course of business, before it waswound up during the relevant previous year, the loss occurringon such sale at a figure less than the written down value ofthe assets should be treated as "Business Loss" under Section41(2) of the Act, quoted above. The treatment of such lossesas Capital Gains either as Short Term Capital Gains or LongTerm Capital Gains would depend upon the period for whichassets are held by the Assessee. In either case, Section 70 ofthe Act provides for Carry Forward and set off of suchBusiness Loss or Short Term Capital Loss in the hands of theAssessee, as Section 70 clearly spells about set off of lossfrom one source against income from another source under thesame head of income. Since in the present case, the businessof the Assessee was closed during the relevant previous yearitself therefore, the other situation of Carrying Forward suchBusiness Loss is not really relevant but, such loss sufferedactually by the Assessee could not have been disallowed bymisconstruing both these provisions. 13. The Assessment of income in the hands of the Assesseeimplies Assessment of loss also and it is a question of factdepending upon the sale value realised by the Assessee on thesale of assets. Therefore, the first question deserves to beanswered in favour of the Assessee and against the Revenue. Wehereby do so. 14. The second question of law is concerned also, we areof the opinion that the Business Expenditure incurred by theAssessee in the form of Postage, Courier and StationeryCharges could not be disallowed by the Assessing Authority andthe Tribunal. The incurring of those Expenditures was notdoubted or disproved by the Revenue Authorities in the handsof the Assessee. No such finding of such Expenditure nothaving been incurred by the Assessee is available on record. https://hcservices.ecourts.gov.in/hcservices/ Therefore, merely because the Assessee could not recover thewhole or part of the said expenditure incurred in the courseof business, particularly to comply with the guidelines laiddown by SEBI and claim such unrecovered expenditure asdeduction from its income, the same could not have beendisallowed by the Authorities below. 15. Apparently, the Audit of the Books of Accounts ofthe Limited Companies is mandatorily provided for in theCompanies Act also and therefore, if the Audit Report andAudited Balance Sheet is available on the record, theexpenditure in question can safely be presumed to have beenverified by the Auditors as well. The Books of Accountsregularly maintained by the Assessee in the ordinary course ofbusiness have neither been rejected by the Assessing Authorityin the present case nor have been otherwise disbelieved.Therefore, such Expenditure in the hands of the Assessee wasrequired to be allowed by the Assessing Authority. Thelearned Tribunal also fell in error in disallowing the same.Therefore, the second question also deserves to be answeredin favour of the Assessee and against the Revenue. 16. The Appeal of the Assessee deserves to be allowed.The same is, accordingly, allowed. The questions of law areanswered in favour of the Assessee and against the Revenue.No order as to costs. Sd/- Assistant Registrar(CS) //True Copy// ssk. Sub Assistant Registrar To 1. Income Tax Appellate Tribunal, 'D' Bench, Chennai 2. The Income Tax Officer (OSD), Company Circle VI (2), Aayakar Bhavan, New Block, 121, Nungambakkam High Road, Chennai 600 034. 3 The Commissioner of Income Tax(Appeals)-IV, Chennai. +1cc to Mr.M.R.Parthasarathy Advocate SR.NO.388571SDR 19/12/2020 T.C.(A) No.381/2009