M.Vinayak V. Dy Commissioner of Income Tax

ITTA/171/2007

AI Insights

The case involves an appeal by the assessee, M. Vinayak, against the decision of the Income Tax Appellate Tribunal, which had upheld the earlier rulings that the loss of Rs. 24,74,584 incurred from fixed deposits in Krishi Bank, which went into liquidation, was a capital loss. The assessee argued that this loss should be treated as a trading loss or a bad debt, which would make it deductible under the Income Tax Act, 1961. The court examined whether such a loss, being incidental to the business operations of dealing in shares and money lending, qualifies as a trading loss. However, it was concluded that the nature of the deposits as fixed investments categorizes the loss as a capital loss, not eligible for deduction under the claimed provisions.

• Counselvise Citation: [2024] 140 COUNSELVISE.COM (IT) 752727 (HC-TELANGANA)
• Appeal Type: Others
• Pronouncement Date: 22-11-2024
• Assessment Year: misc
• Other Referred Cases: Badridas Daga vs. Commissioner of Income Tax, Commissioner of Income-Tax, U.P. vs. Nainital Bank Ltd., Ramchandar Shivnarayan vs. Commissioner of Income-Tax, A.P., Chhotulal vs. Ajitsingh, Commissioner of Income-Tax, Poona vs. P.V. Gore & Co.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: J V PRASAD
• Assessee Lawyers: DUWA KUMAR
• Keywords: Bad debt; Capital loss; Fixed Deposit; Income Tax Tribunal Appeal; Liquidation; Trading loss; Krishi Bank
• Section: 143(3); 27; 28; 36(i)(vii); 260-A; 196r

Judgement Text

"[ 3418 ] IN THE HIGH COURT FOR THE STATE OF TELANGANA AT HYDERABAD FRIDAY, THE TWENTY SECOND DAY OF NOVEMBER TWO THOUSAND AND TWENTY FOUR PRESENT THE HONOURABLE THE CHIEF JUSTICE ALOK ARADHE AND THE HONOURABLE SRI JUSTICE J SREENIVAS RAO INCOME TAX TRIBUNAL APPEAL NO: 171 OF 2OO7 lncome Tax Tribunal Appeal under Section 260-A of the lncome Tax Act, '1961 , against the Order of the lncome Tax Appellate Tribunal, Hyderabad Bench 'A', (SMC), Hyderabad in l.T.A. No. 1173 I Hyd. 12005 for Assessment Year 2002-03 dated 21-09-2006, preferred against the Order of the Deputy Commissioner of lncome Tax Circle 6[1], Hyderabad dated 30-09-2005 in PAN / GIR No. V- 980/AC.6(1). Between: M. Vinayak, Hyderabad, R/o. H.No. 8-2-32411, Green Valley, Road No- 3, Banjara Hills, Hyderabad - 34 ...Appellant AND Dy Commissioner of lncome Tax, Circle 6 [1], Hyderabad ...Respondent Counsel for the Appellant Mr Duwa Pavan Kumar Rep. MrY Ratnakar Counsel for the Respondent Mr J V Prasad Sr. SC for lncome Tax DePartment The Court delivered the following Judgment : I THE HON'B LE THE CHIEF JUSTICE ALOK ARADHE AND THE HON'BLE SRI JUSTICE J.SREENTVAS RAO I.T.T.A. No. I7l of 2OO7 JUDGMENT | (Per the Hon'ble the Justice J.Sreeniuas Raol Mr. Duwa pavan Kumar, learned counsel represents Mr. Y. Ratnakar, learned counsel for the appellant Mr. J.V. prasad, learned Senior Standing Counsel for Income Tax Department for the respondent. 2. This appeal under Section 260A of the Income Tax Act, 196 1 (hereinafter referred to as .,the Act,,) has been filed by the assessee. The subject matter of the appeal pertains to assessment year 2OO2_2OO3. The appeal was admitted on the following substantial question of law: moneys deposited in Krishi Bank being lost due \"Whether sustaiued by to liquidation deduction as business loss Tax Act, 196 1 under Section 196r?\" the loss of Rs.26,15,569/_ the appellant on account of of the Bank is allowable as a the same is a trading ioss or under Section 2g of the Income or in the a-lternative bad debt 36(i)(vii) of the Income Tax Act, ) 3. The factual background in which the aforesaid substantial question of 1aw arises for our consideration need mention. 4. The assessee is engaged in the business of sale of electrical goods, money lending and deal'ing in shares and mutual funds' The assessee has filed his returns of income on 08.10.2002 for the assessment year 2OO2-2O03 declaring loss of Rs'24 '7 4 '584/ - on account of the fact that fixed deposits with Krishi Bank having been lost on account of liquidation of the said Bank' The assessee claimed the aforesaid amount of Rs'24'74'584/- as d'eduction on the ground that the same is a trading loss or bad debt under Sections 27 and 28 of the Act' 5. The assessment under Section 1a3(3) of the Act was completed by the Assessing Officer ot 3lJ.22O04 and aforesaid loss was disallowed on the ground that the said amount constitutes a capital loss' Being aggrieved, the assessee filed an appeal before the Commissioner of lncome Tax (Appeals)' The appeal was dismissed by an order dated J 30.09.2O05. Thereupon, the assessee filed arl appeal before the Income Tax Appellate Tribunal (hereinafter referred to as \"the Tribunat\"). 6. The Tribunal by an order dated 21.09.2006 inter alia held that the amount of Rs.24,74,584/- cannot be claimed as bad debt or trading loss and upheld the order of the Commissioner of Income Tax (Appeals) and dismissed the appeal. In the aforesaid factual background, the assessee has approached this Court by filing this appeal. 7 . Learned counsel for the assessee submitted that the assessee is engaged in the business of dealing in shares as well as mutual funds and money lending. Therefore, the loss, which was sustained by the assessee, is incidental to carrying on his business and should be deducted in computing the profits. Reliance has been placed in cases where the amount was lost in the course of business on account of misappropriation and it has been c:ontended that in similar analory the loss sustained by the assessee deserves to be treated as trading loss. .1.J- I I 4 8. In support of the a-foresaid submissionS' reliance has been placed on the decisions of the Supreme Court in Badridas Daga vs' Commissioner of Income Taxl' Commissioner of Income-Tax' U'P' vs' Nainital Bank Commissioner of Ltd.2, Ramchandar ShivnaraYan lncome-Tax, A'P'3' Chhotulal vs. Ajitsingh Rajasthan+ vs. and Commissioner of Income-Tax' Commissioner of Income-Tax, Poona vs' P'V' Gore & Co.s. g . Learned counsel for the Revenue submitted that the loss of the assessee cannot be termed as the loss in the course of the business' It is further submitted that the deposits made by the assessee were in the nature of fxed deposit investments' the assessing oflicer has rightly treated the same as capital loss and added back the same tototalincome.ltisalsoarguedthatthefindingsoffact recorded by the Assessing Oflicer' Commissioner of Income Tax (Appeals) as well as the Tribunal do not suffer from any I (1958) 34 ITR 10 (SC) :i*:l:ll+;*'fi1, o irsz:i sg ITR 178 (Ral) ' irse:i t+: IrR 922 (Bom) 5 '0 infirmity warranting interference of this Cour-t in this appeal under Section 26OAof the Act. 10 We have considered the submissions madt: on both sides and have perused the record Before proceeding further it is apposite to take note of the relevant statutory provrsrons which are reproduced below for the lacility of reference: .Section 361Ulyiil :.Subject to the prouisittns of sub-section (2), the amo. whichis*i,il,'.i\"\"i:::{::rr,::,:i;!,\"2:::\":,,'^:;\",;[ asses-see/or the preuious gearl : [Provided that in the t ctause(uiia)\"iui.\",\",L\"tr:y:!.rt:;;:;:;;:::;\"W: ang such debt or part thereof shait a\" u^ii\"'i\"i\"'inZ\".onlount bg which such debt or baLance i\" th;;r;;;;.;', Part thereof exceed's the <:redit ^ \" a.,,.il,' r n:;\"\"\";;:J f \"' b ad a n d d ou bttu t d e b ts a c cou nt [Provided further that u.there the amount of such d.ebt or port thereof has been take^n.into account ii \";iorirg ,n tncome of the a.ssessee of the preuious o.\"r-^r,li,*n ,n\" I!.!r\"r^!:\":h debt or part thereof becomes inecouerabte or oJ an earlier preuiou: computotion ana dbclosu)^a:.\"' ?\" -the bctsis of income section(2).r\".ii,1\"{!i*;ffy::\"::;T;:::::,;i:; accounts, then, such debt c th. pre'i.ous'o;;;';';;'oart thereof shalt be altouteri in becomes trrecouerable \"r;l:y\"!' 'debt or part thereof debtorpart,;;;.,;;;,\"\";:.:;::::\"t:oX'tr:\".,:::;;:: the accounts for the purposes ol nb \"Uur\",.1 [Explanation 1.]- For the, n deito,o\"n'in\"ni1';\"^#':Z);{',T\"::::;Z:\"lr,Xi , 6 accountsoftheassesseeslnllnotinclud'eangprouisionfor ii ora doubtfut debts made in the accounts of the assessee./ E;;;;;i\"\" 2.- For the remouat of doubts' it is herebs ctaified that for the purposes of the irouiso to clause.^(,ui) of \"ii*\"\"\"ua \"\".iion ond \"lous,n (u) of sub-section (2)' the \"*J*\"i- *.\"d to therein shall be onlg one account in :;:r;;;'Ji-o,o\"*^\" for bad ond doubtfut debts under clause (uiia) and such account sholl relate to atl tgpes of \";;;;;\";\"\", i,nctuding aduances made bg rural branchesJ; Sectlon28 ts and qalns of businessor profession: - The follouting income sltall be chargeoble to income-tax under the heod \"Profits and gains of business of profession\", 'iii\" prolir, ond goins ol ang business or profession.ushich uas coried on bg the ot\"J\"\"t\" at anA time during the ';:T':;il:\"sation or other poament 1y'.* \":3:*'d *oitk\"\"o ).r\"on, bg uhateuer name called' managing the u,hole or substantiallg the uhole of the affairs of on lndian cofipanA' at or in connechon uiin tne tennination of hi's ;;;;t:;;; or the modiftcation of the terms and conditions retating thereto; g the 'b);';;,; 0,\"r\".\" bA uholeuer name called' mandgtn uthole or substantiatlg tre ttllnle of tne yfly,rs :\" !!'\" \"f ;;;\";;r-..*oana, ot or in connection rt'rith tle termination :;'^;\" :frt;; ;: lnJ' ^o ai7'\"otion of the terms and conditions relating tlereto; '[ir^o-ou*\", ba uhateuer name called' holding an agencg in lndia for ang pan oJ me actiuities retoting t.? th: b::iness of ang other person, ot or in connection t'uith the termination of the agencA or the modification of the term^s and ion ditions re I ating the r eto : \"Ai7*i i\",\"n io' o' in connection tuith t-he uesting in the Gouemment, or in ang corporction otaned' or .controlled bu the Gouernment, und'er ong to- 7o' th: ti:le-!:.:nS in force' of the management o[ ony properlg or bustness'l bi.\";;a oi,:on . \", 4::;:; \"iTI,ilJii\",,!^'i,# conn.ection uith the tem i i 7 terms and conditions, of ang contract relating to hb business;l llj)income deiued association from members; {!jja)l profits on sale bA d trade, professionaL or spectfic seruices performed similar for its of a licence granted. und.er the [mports (Control) Order, 1955, made under the Imports and Exports (Control) Act, t g47 (18 of 1947t:1 finu'[ cash assistance (bg uhatiuer name called) rece,iued or receiuable by any person aI ann-st exports under ang scherne of the Gouemment of India;l ltna)t ang dutg of custon:rs or exci-se re-paid or re pagable as drawback to anA person agatnst exports under the Astom,s and ()entral Excbe Duties Drawback RuLes, 1971;l tiiid)[ anA profit on the transfer of the DutA Entitlemen.t pass Book Scheme, being the Dutg Remission Scheme under the export and import policg formulated and announced under section 5 of the Foreen Trade (Deuelopment and_ Regulation) Act, 1 992 122 of j 992t:t I]LeX ang profit on the transfer of the Dutg Free Replenishment Certificate, betng the Dutg Remissjon Scheme under the export and import policy formutated and announced under section S of the Foreign Trade ( D e ue Lopme nt and Re gulation) Ac| 1992 2o 1 000 fiy)[ the ualue of ang benefit or perquisite, ultether conuertible into moneA or not, aising from business or the exercise of a profession;l L4t a.nA interest, salary, bonus, commtssior,,. or remuneration, bg uhateuer name called, d.ue to, or receiuetl lO'.:^17\":* of a firm from such firm: Section tl (u,t.e.J.. 1.4. 1993 ).lproutded that ut commissionorr.mun\"rotio'::r;Z;::\":;:'r:1:*;r?;';,\"'; anA part thereof has not been allouted. to be deducted ttnd.er lausy lb) of section 4O, the income und.er thi.s ctoul\" ,nilt b,\" iaiy\"t\"_a b the extent of the amount n\",,o oiio_ni ,o r. deducted;l lpe)[ anA sum, whether receiued. or receiuable, in cash or kind, under an agreement for_ (a)not carrying out unA actiuitg in relation to ang bisines\", orfAjno\", \"lno;;n ,rO know-how, potent, copAright, trade-mark, tic\"nce, llaic nrse or ang other busrness or commercial ight of sim-illr nature or infonnation or techntque likelg to assisf jn the 8 manufacture or processing of goods or prouision for seruices: i\"ii.o that sub-clause (a) slalt not applg to- - tr) anA sum' uhether receiued or receiuabte' in cash or '**i'in o\".oun' of transfer of the'nght t? .mlnufacture' ;;.;;r* or process ang arttcte or thing or right to cdmt on '::;;:\":\".:;: *i*i ' chnrseabte under the head' \"copitat nn?,'T^*,,^,\"\":::::,f.:,#\"\"T{Jii;[li!\"'i;.3::i::ff: fund of the Montteal Protoc tZi^| -io.' under the IJnited' Nattons Enuironment ;;;;*;, in occordance .,,ith the terms of agreement ^.*i\",r.O into tuith the Gouernment of India' \"i*ptonotion' - For the purposes o/this clause'- (i)\"agreement\" includes ong oningn^\"nt or understanding or action in concert'- \"l-;;;;;;-o' noi 'u\"n orrangement' understandins or action b formal or tn utnttng: or ;;';:;;,;;;';.\"\":'\",*,;.::\"*f ,!ii;\"]\"?i7\"2:::i;;2,\" action is intended to be er (ii) \"seruice\" ^\"ont ';le''\"\" of any descnption ,tn'::.':: ^\"O' auaitable to potential '\"-\"'\" o'ia inctuies tlte prouision of seruices in connection *ffu A\"in.at\" of ong industial or comm.ercial nature such as accounting' banking' communication' ton\"gia of nettts o'- tnformation' aduertising, entertainm'int' amusement' education' fr;;;;;,\"','*\"'\"\"\"r*,.l,in:\"\";r';;\";':::*:Z;':i:T, transPort, storage' Proce ener)Y, boarding and lodging;l uti':i;';;,;;::\":i,i-;i,-7il\":;T:;:::\"'z::7^ including the sum aurt policg ' 7e purposes of rhis ct( se' the lF;xplonation'...- *! \",2;;'\"'\"--pai.g,' shatl haue the exoression \"Kegman t T;7;;';';;;Za * u'^ ctause (1o'D) of section '1o;l 'i;-;;;'P';^\" \"',;li:,':,T::X::\"::f .*i':,\"';:: uthich it is anuerted ' determined in the prescibed manner) i;t;\";;-;\"^,:;::y:]Z*;f ,Zi:':;\"f :i;::\",n!*\",ZilZi, 2l!!;J,i,'::\";',:\":;;; \";I;*'^'^t) beins d.emotished' iestroged, discarded\"*'i*'op*\"a' if the ttlate of the 9 expenditure on such capital a-sset has been a owed. as a deduction under section 3S_AD;l [Explanatton I omitted bg Act 4 of tg|7, Section 28 (w.e.f. 1.4. 1989).1 Expranation 2. - where specutatiue transaction_s ca,ried on bg an assessee business, ,h\" o\" of such a nafure as to constitttto n ,,speatationrr.,roJ\"li\"r'i,r,:.#:!:;r::t\":;\";\"i:* separate from ong other business. FollouLing Explanatton 3 shalL be insened. ajl.er Expktnation 2 to ,sectton 28 ba the Finance W;;;;,Zoz+, ut.e,.1. t_+_ Expla.nation 3.- It is _herebg claified. that ang incom.e from lettinq out of a resid.entia-tlr\"\"\" \", \"' i\"i \"f the house bg the ouLner shatt not be chargeabte ;;;;r; head. ,.profi.ts ad gains of business \"io or\"f\".\"r\"n)\"'ona shall be chargeabte under the h\"\"d \"1\"\";^; f;;;'nou\". prop.rtg,. 1 1. After having noticed the relevant statutory provisions, we may aclvert to the facts of the case in hand. The assessee ha.s engaged in the business of sa_le of electrical goods, money lending, dealing in shares and mutuai funds and he deposited arr amount of Rs.24,74,SgO/- with Krishi Co-operative Bank and the said barrk went into liquidation. The assessee: claimed the above said amount as deduction on the ground that the same is trading loss or bad debt. The assessing oflicer after going through the statements and records passed order on 31.12.2OO4, holding that the deposits made by the assessee were in the nature of fixed deposit investments out of available profits/ capital of the ::10:: assessee and the same was treated AS capital loss and denied the clarm of the assessee as a trading loss' The above saidorderwasconfirmedbytheCommissionerof said order Appellate from the Income Tax (Appeals) by its order dated 30'09'2005 and the was further confirmed by the Income Tax Tribunal (Hyderabad) by its order dated 2t.o9.2006. 12. In Badridas Daga's case (supraf the Hon'ble Apex Court held that the marn principle in this case revolves around whether an embezzlement loss caused by an employee's misconduct is deductible as a business expense under Section 10 of the Income Tax Act' Specifrcally' it questions whether such a loss' incidental to the conduct of the business, can be considered a \"trading 1oss\" and thus deductible, as it a-rose from the risks inherent in business operations . The primary issue is whether the loss resulting employee Chandratan's misappropriation of could be claimed as a deductible buslness Rs.2,O2,442 exPense bY the aPPellant, considering the loss stemmed from the emPloYee's unauthorized withdrawal of business funds. The case hinges on determining if such a loss is iJ ::11:: incidental to and inseparable from business operations, thereby qualifying trading loss deductib [e under asa Section 1O(1) of the Income Tax Act. 13. In Commissioner of Income-Tax, U.P.'s case (supra|, the Hon'lcle Apex Court held that under Section 1O(1) of the Income Tax Act, a trading loss is deductible if it is incidental to the business operations. The loss must be closely connected to the nature of the business and the risks inherent in carrying it out. In the case of a bank, the retention of money on its premises inherently carries risks such as theft, embezzlement, or dacoit5z, which are considered part of the normal business operations. The Court emphasized that the frequency or degree of the risk rs less important than its direct relationship to the business, ald the loss due to dacoity in this case was deemed a deductible trading loss as it was incidental to banking operations. 14. In Ramchandar Shivnarayan's case (supra), the Hon'ble Apex Court held that a loss arising from theft can l. be considered a trading loss and deductible when it is ..1r.. directly connected to ar incidental to the business operations of the assessee. In this case, the loss of Rs. 30,000 was a result of money brought for the purpose of purchasing Government securities, which is an integral part of the assessee's business activities. The court emphasized that the loss, although not explicitly covered in the tax laws, was part of the ordinary course of business and, therefore, should be treated as a trading loss' This principle was reinforced by previous rulings such as Badridas Daga (supra| and Nainital Bank Ltd' (supraf, where it was established that any loss that is inherently linked to the business operations and is necessar5r for conducting those operations is deductible, even if it is caused by unforeseen events like theft. The judgment rejected narrow interpretations that failed to recognize the loss as incidental to business operations, affirming that such losses should be accounted for in calculating the true taxable profits. 15. In Chhotulal Ajitsingh's case (supra), the Rajasthan High Court held that loss due to theft is deductible under Section 1O{J)1lf the Income Tax Act if it arises directly from ::13:: t the business and is incidental to the business operations. The timing of the theft, such as whether it occurs during business hours or after, is not crucial that matters pertains in connection between the loss and the business activity and the main principle is whether the loss causr:d by theft of cash from the business premises, after the business had closed for the day, could be considered a deductible expense\" The Income Tax authorities initially denied the deduction, arguing that the theft occurred outside of business hours, but the case ultimately business operations turned on whether the loss was incidenta-l to the business 16. In Commissioner of Income_Tax, poonars case (supraf, the Bombay High Court held that a loss incurred by a business due to an incident, such as the theft of cash, is deductible if there is a direct ald proximate connection between the loss and the business operations. The court foliowed the principle Ramchandar Shivnarayan tn (supraf, emphasizing that when a loss is incidental to the business ancl arises from acts necessary for carrying on the business,. it-js considered a trading loss and should be ::14:: allowed as a deduction in computing the business profits' In this case, the loss of cash' which was being carried for safe custody after business hours' was deemed to be incidental to the firm's business' 17. The principles laid down in the above said judgments are not applicable to the present facts and circumstances of theCaSeonthegroundthatthedepositsmadebythe assessee were in the nature of fixed deposit investments' Therefore, the loss suffered by the assessee when the bank went to liquidation is only a capital loss' Hence' the claim of the assessee cannot be treated as bad debt or trading 1oss. 18. It is pertinent to mention that the Assessing Officer evidence has sPecifrcallY gave a after going through the finding that the loss suffered by the assessee is only capital Ioss and the same was confirmed by the appellate authority as well as tribunal' The said finding of the fa't cannot be adjudicated in the appeal, while exercising the powers conferred under Sectio n 260A of the Act appeal is very limited' , as the scoPe of the :t.{i: 19 ' In view of the preceding anarysis, the substa,tial question of raw is arrswered against the assessee in favour of revenue 20. :: l5:: //TRUE COPY// In the result, we do not find any merit in this appeal. Accordingly, the same tails arrd is hereby dismissed. Miscellaneous applications, if any pending, sha,ll stand closed. There shall be no order as to costs. i sdfiq.y.s.s.6.s. M. SATRMA JOINT REGISTRAR , / SECTION OFFICER To, 1 2 5 4 The lncome Tax Appellate Tribunal, A Bench, SMC, Hyderabad The Deputy Commissioner of lncome Tax Circle 6[1], Hyderabad One CC to lrlr Y Ratnakar, Advocate [OPUC] 9^rlg 9^9 to Mr.J V Prasad, Sr. Standing Counsel for lncome Tax Department loPUCl Two CD Copies 5 VA/gh * HIGH COURT DATED:2211112024 JUDGMENT lTTA.No.171 of 2007 DISMISSING THE ITTA lcog(nA n z (r o l-a ll: { li Lj: l\" tt. ,- ', - \"1t ! ...;, J]l L, a,. -'\"' 202{ _l F* IAfF "