EVEREST KANTO CYLINDER LTD ,MUMBAI V. DEPUTY COMMISSIONER OF INCOME TAX, CPC BENGALURU, MUMBAI

ITA 782/MUM/2024

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Everest Kanto Cylinder Ltd appealed against the order of the Commissioner of Income-tax (Appeals) which had sustained disallowances made by the Assessing Officer under sections 143(1) and 250 of the Income-tax Act, 1961. The disallowances pertained to expenditures claimed by the assessee, including penalties and interest on delayed tax payments, and a loss on the sale of assets. The Tribunal examined the legal provisions and precedents cited by both parties, ultimately deciding to allow the business expenditure claims but disallow the loss on asset sales, categorizing it as a capital loss.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 474449 (ITAT-MUMBAI)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 20-01-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: E
• Assessment Year: 2021-2022
• Other Referred Cases: Mahalakshmi Sugar Mills Co Ltd vs CIT, Prakash Cotton Mills (P.) Ltd vs CIT, CIT vs Enchante Jewellery Ltd, CIT vs Tarun Commercial Mills Co. Ltd, CIT vs J. H. Gotla, CIT vs Urmila Ramesh, Share Aids (P) Ltd vs ITO, CIT vs Bombay Corporation
• Laws Referred To: Income-tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: BISWANATH DAS
• Assessee Lawyers: SHEKHAR GUPTA
• Keywords: Business income; Capital asset; Business expenditure; Depreciation; Cost of acquisition; Capital Gains
• Section: 250; 201; 143(1); 37; 28; 37(1); 41(2)

Judgement Text

" IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “E”, MUMBAI BEFORE SHRI ANIKESH BANERJEE, JUDICIAL MEMBER AND MISS PADMAVATHY S., ACCOUNTANT MEMBER ITA No.782/Mum/2024 (Assessment Year : 2021-22) Everest Kanto Cylinder Ltd 204, Raheja Centre, Free Press Journal Marg, Nariman Point Mumbai-400 021 PAN : AAACE30836F vs Deputy Commissioner of Income- tax,Circle 3(4), Mumbai World Trade Centre 1, Cuffe Parade, Mumbai-400 005 APPELLANT RESPONDENT Assessee by : Shri Shekhar Gupta Respondent by : Shri Biswanath Das CIT DR Date of hearing : 02/01/2025 Date of pronouncement : 20/01/2025 O R D E R PER ANIKESH BANERJEE, JM: Instant appeal of the assessee was filed against the order of the Learned Commissioner of Income-tax Addl. /JCIT(A)-3, Chennai, *for brevity, ‘Ld.CIT(A)’) passed under section 250 of the Income-tax Act, 1961 (for brevity, ‘the Act’), date of order 05/02/2024 for A.Y. 2021-22. The impugned order was emanated from 2 ITA No.782/Mum/2025 Everest Kanto Cylinder Ltd the order of theCPC, Bengaluru, passed under section 143(1) of the Act, date of order 14/12/2022. 2. The assessee has raised the following grounds of appeal:- “1.The learned CIT (Appeals) has erred in law and on the facts of the case in sustaining the disallowance of Rs. 52,34,554/- 2.The learned CIT (Appeals) has erred in law and on the facts of the case in sustaining the disallowance of Rs. 56,79,558/- being loss on sale of assets. 3. The assessee craves leave to add, alter or amend the above grounds of appeal.” 3. The brief facts of the case are that the assessee during the impugned assessment year claimed expenditure, paid by way of penalty or fine related to interest and penalty on delayed payment of Central Sales-tax, interest& penalty on non-fulfillment of advance license obligationand interest on delayed payment of GST which was total amount of Rs.52,34,554/-. The details of the expenses incurred with item-wise list is as follows: - Sr.No. Expenditure by way of penalty or fine for violation of any law for the time being force Amount (Rs.) 1 Interest on delayed payment of value added tax and central sales tax 12,53,782 2 Penalty on delayed payment of value added tax and central sales tax 29,589 3 Interest on non-fulfillment of advance license obligations 38,77,770 4 Penalty on non-fulfillment of advance license obligations 73,175 5 Interest on delayed payment of Goods and Services Tax 238 3 ITA No.782/Mum/2025 Everest Kanto Cylinder Ltd 3.1 Out of the above payment, item at serial No.2 related to Penalty on delayed payment of value added tax and central sales tax had not been pressed; hence, it is taken as withdrawn. 4. The assessee first argued the issue related to the rest of the additions as per the above mentioned list made by the Ld.AO for disallowance of expenditure claimed by the assessee in the P&L Account. The assessee generated the loss for sale of assets under section 50 of the Act amount to Rs.56,79,598/-. The said loss was set off with the current year business income as per provisions of section 41(2) of the Act. The Ld.AO, while processing the return under section 143(1), rejected the expenditure claimed by the assessee and also disallowed the loss set off with the current year’s income. The aggrieved assessee filed an appeal before the Ld.CIT(A). The Ld.CIT(A) upheld the observation of the Ld.AO. Being aggrieved on the appeal order, the assessee filed an appeal before us. Argument related to expenditure by way of penalty or fine. 5. The Ld.AR in argument placed that the interest on delayed payment of GST and VAT is duly covered by the order of the Hon’ble Apex Court in the case of Mahalakshmi Sugar Mills Co Ltd vs CIT (1980) 123 ITR 429(SC). We respectfully relied on the order of the Hon’ble Apex Court in the case of Prakash Cotton Mills (P.) Ltd vs CIT 201 ITR 684 (SC) where the Hon’ble Apex Court ruled that the claim of business expenditure under section 37(1) is an allowable expenditure related to interest and damages paid by the assessee was compensatory in nature so as to entitled for deduction under section 37(1) of the Act. Accordingly we follow the judicial consistency and the order of the Hon’ble Apex Court squarely covers the assessee’s matter and accordingly, serial No.1 of the above mentioned list for 4 ITA No.782/Mum/2025 Everest Kanto Cylinder Ltd interest on delayed payment of VAT and CST amount to Rs.12,53,782/- is allowable expenditure and the addition is uncalled for. 6. Related to interest on non-fulfillment of advance license related to serial no. 3 & 4 of theabove-mentioned list, the Ld.AR placed that the assessee is engaged in business of manufacture of CNG cylinders. The assessee import seamless steel tubes from China. The assessee manufactures CNG cylinders from the steel tubes and export the same. As per the import / export policy of the Government of India, if the assessee does not pay any customs duty on the import of seamless tubes and there is an obligation to export the manufactured CNG cylinders as per scheduled formula and if the assessee does not fulfill the obligation to export, the assessee was liable to pay interest and penalty for such non-fulfillment of advance license obligations. The assessee relied on the order of the Hon’ble Delhi High Court in case of CIT vs Enchante Jewellery Ltd 40 taxmann.com 216 and the order of the Hon’ble Gujarat High Court in case of CIT vs Tarun Commercial Mills Co. Lt 107 ITR 172 (Gujarat) where the Hon’ble Gujarat High Court ruled that where there was no breach of a public policy which might render payment, agreed to be made for default arising as a result of breach as one akin to penalty or infraction of law and hence amount paid by the assessee for non-fulfillment of export obligation was allowable as business expenditure. Accordingly, we follow the order of the Hon’ble Delhi High Court and Hon’ble Gujarat High Court and the interest and penalty on non-fulfillment of advance licence obligation amount to Rs.38,77,770/- and Rs.73,175/- respectively are allowable expenditure under section 37(1) of the Act. The Ld.DR was unable to bring any contrary judgement to refute the argument of the Ld.AR.Accordingly, the expenditure claimed by the assessee amount to 5 ITA No.782/Mum/2025 Everest Kanto Cylinder Ltd R.52,04,965/- (Rs.52,34,554/- (-) Rs. 29,589/-) is allowed expenditure under section 37(1) of the Act. In the result, the ground No.1 of the appeal of the assessee is partly allowed. Ground No.2: Disallowance of loss on sale of asset 7. The issue is related that the assessee sold the motor car cascade trailer during the impugned assessment year and the sale value was lower than the written down value of the asset. Accordingly, assessee generated loss amount to Rs.56,79,598/-. The relevant table is duly annexed as below:- Asst sold during FY 20-21 Motor Car Cascade Trailor Cascade Total Date of Sale / transfer 01/08/2020 20/08/2020 30/12/2020 24/02/2021 Book value of Asset 60,00,000 87,52,932 21,11,970 95,33,898 2,63,98,800 Accumulated Depreciation up to Date of Sale 38,43,108 6,53,834 12,84,185 5,73,208 63,54,335 Total Net Block of Deduction on date of Deduction 21,56,892 80,99,-098 8,27,785 89,60,690 2,00,44,465 Sale Value 11,71,429 46,60,000 5,33,438 80,00,000 1,43,64,867 (Profit)/Loss 9,85,463 34,39,098 2,94,347 9,60,690 56,79,598 The assessee adjusted the loss with the same year’s business income. The Ld.AO rejected the loss. Finally, the order was carried before the Ld. CIT(A) and the appeal was rejected. The Ld.CIT(A) has taken the view which is reproduced as below: - “5.3.3 Concerning the remaining sum of Rs. 56,79,598/- (8,66,99,535-8,10,19,937) relating to the loss on the sale of assets, it is noted from records that the company sold 6 ITA No.782/Mum/2025 Everest Kanto Cylinder Ltd the assets at a price lower than what they were shown in the books of accounts. It is important to note that under the Income Tax Act, the concept of a block of assets is provided for fixed assets. This means that all the assets belonging to a particular category are clubbed together and known as a block of assets. Whenever an asset is sold from this block, the sale price is reduced from the written down value of the block (WDV). The profit or loss is computed only when the block ceases to exist. Otherwise, no profit or loss is allowed as a deduction. Section 43(6)(c)(i) of the Income Tax Act provides that the WDV of the block of assets will be computed by reducing the moneys payable in respect of any asset falling within that block, which is sold or discarded or demolished or destroyed during that previous year. So, once the sale price is already reduced from the WDV, the appellant cannot claim it as a loss. Also, for the sake of clarity, Section 37 provides that an expense of capital nature shall not be allowed as a deduction. Therefore, the loss on the sale of fixed assets is a capital loss and accordingly not allowed as a deduction. The combined reading of Section 43(6)(c)(i) and Section 37 clearly indicates that the sale price of fixed assets has to be reduced from WDV and cannot be claimed as an expenditure. Therefore, the appellant arguments cannot be accepted. Hence, the loss of Rs. 56,79,598/- disallowed by the AO (CPC) does not require any interference. Thus, the sum of Rs. 56,79,598/- is confirmed.” 8. The Ld.AR in argument and placed thatwhere the full value of theconsideration received or accruing as a result of the transfer of the asset togetherwith the full value of such consideration received or accruing as a result of the transfer of any other capital asset falling within the block of assets during the previous year, exceeds the aggregate of the following amounts, namely: (i) Expenditure incurred wholly and exclusively in connection with such transfer or transfers; (ii) The written down value of the block assets at the beginning of the previous year, and 7 ITA No.782/Mum/2025 Everest Kanto Cylinder Ltd (iii) The actual cost of any asset falling within the block of assets acquired during the previous year. Such excess shall be deemed to be the capital gains arising from the transfer of short-term capital assets. Any block of assets ceases to exist as such, for the reasons that all the assets in that block are transferred during the previous year, the cost of acquisition of the block of assets shall be the written down value of the block of assets at the beginning of the previous year, as increased by the actual cost of any asset falling within that block of assets, acquired by the assessee during the previous year and the income received or accruing as a result of such transfer or transfers shall be deemed to be the capital gains arising from the transfer of short term capital assets.Thus, the provisions of section 41(2) of the Act and of section 50 of the Act simultaneously exist in the Act. It may be noted that the plain provisions of 41(2) of the Act should prevail over the provisions of section 50 which are of the nature of deeming provisions because deeming provision assume existence of a fact which does not really exist. The Ld. AR respectfully relied on the caseIndira Sawhney Vs. Union of India, JT 1999 (9) SC 557. In the case of CIT V/s. Bombay Corporation AIR 1930 PC 54, Lord Viscount Dunedin explained legal fiction by observing: Now a when a person is \"deemed to be something, the only meaning possible is that whereas he is not in reality that something, the Act of parliament requires him to be treated as if he were\". Therefore, the plain provisions of the Act will prevail over deeming provisions. 9. Section 28 of the Act provides that the profit and gain of any business or profession carried on by the assessee, at any time during the previous year shall be chargeable to income tax under the \"Profits and Gains of business or profession”. Section 29 of the Act provides that income from profits and gains of 8 ITA No.782/Mum/2025 Everest Kanto Cylinder Ltd the business or profession referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D. Therefore, in computing the income from business, the provisions section 41 of the Act would be applicable. The Hon’ble Supreme Court in the case of CIT V/s. J. H. Gotla, 156 ITR 323 (SC) has held that the word \"income\" includes \"loss\". Therefore, if the sales consideration of assets falls short of WDV of assets, the balance beingloss is to be considered for the purpose of allowance under section 41(2) of the Act. This analogy squarely applies to the provisions of section 50 as well which only provides for short term capital gain where the full value of consideration is in excess of WDV etc. It do not provide for the converse situation. But as the word \"income\" includes loss the short term capital loss falls within the purview of section 50 as well. As the provisions of section 41 (2) and section 50 coexist, an assessee can take the benefit of section 41 (2) which is more beneficial to him. The Supreme Court in the case of CIT vs. Urmila Ramesh (1998) 230 ITR 422 (SC), has held that both section 41 (2) and section 50 of the Act cannot apply to the same amount. 10. The Ld.DR vehemently argued and relied on the order of the revenue authorities.The Ld. DR was unable to bring any contrary judgement to refute the argument of the Ld.AR 11. We have carefully considered the rival submissions and examined the documents available on record. The assessee has relied on the judgment of the Hon’ble Madras High Court in the case of Share Aids (P) Ltd. vs. ITO[124 taxmann.com 256 (Mad)], wherein it was held that when certain assets forming part of block assets, other than immovable property, are sold in the ordinary course of business before being held during the relevant previous year, the 9 ITA No.782/Mum/2025 Everest Kanto Cylinder Ltd resulting loss—if the sale price is less than the written-down value—should be treated as a business loss under Section 41(2) of the Act. The assessee has argued that Section 50 of the Act, being a deeming provision, should yield to the plain language of Section 41(2), as the latter directly addresses the treatment of such losses. Reference was made to the principle that deeming provisions create a legal fiction to assume the existence of facts that do not exist in reality, as laid down in Indira Sawhney (supra). In response, the Ld.DR contended that the process of calculation is clearly outlined in Section 43(6)(c)(i) of the Act, which applies to \"any block of assets,\" including both movable and immovable assets. Further, as per Section 41(2) of the Act, any income arising from the sale of assets exceeding the written-down value is taxable. Similarly, if the sale consideration falls short of the written-down value, the resulting loss is also addressed under Section 41(2) of the Act. The Ld. DR also referred to the decision of the Hon’ble Supreme Court in J.H. Gotla (supra), which held that the term “income” includes “loss.” Therefore, if the sale consideration is less than the written-down value, the resultant balance (loss) should be considered under Section 41(2) of the Act. However, it was argued that the judgment of the Hon’ble Madras High Court in Share Aids (P) Ltd is distinguishable. Paragraph 12 of the said judgment specifically noted that the loss was allowed in the context of a business closure, rendering the carry forward of loss irrelevant. Furthermore, it is emphasized that while Section 41(2) recognizes the loss, the characterization of the loss is determined under Section 50 of the Act, which treats it as a short-term capital loss (STCL). 10 ITA No.782/Mum/2025 Everest Kanto Cylinder Ltd The next issue raised pertains to whether the said STCL can be set off against the current year’s business income. As per the amendment to Section 70 of the Act by the Finance Act, 2002, with effect from 01.04.2003, the provisions of Section 70(2) clearly stipulate that a short-term capital loss can only be adjusted against income from other capital assets. Accordingly, the adjustment of STCL against business income is not permissible. In light of the above, Ground No. 2 of the assessee’s appeal fails and is dismissed. 12. In the result, appeal of the assessee bearing ITA No.782/Mum/2024 is partly allowed. Order pronounced in the open court on 20th day of January, 2025. Sd/- sd/- (PADMAVATHY S.) (ANIKESH BANERJEE) ACCOUNTANT MEMBER JUDICIAL MEMBER Mumbai,दिन ांक/Dated: 20/01/2025 Pavanan Copy of the Order forwarded to: 1. अपील र्थी/The Appellant , 2. प्रदिव िी/ The Respondent. 3. आयकरआयुक्त CIT 4. दवभ गीयप्रदिदनदि, आय.अपी.अदि., मुबांई/DR, ITAT, Mumbai 5. ग र्डफ इल/Guard file. BY ORDER, //True Copy// (Asstt. Registrar), ITAT, Mumbai "