Setting off of Capital Loss on Land, Building, Plant & Machinery against Business Income
1. When the dominant object was to purchase the capital assets, the loss on sale of same cannot be adjusted against Business Income
2. There must be nexus between purchase of land, building and plant and machinery on one hand and the hotel business being carried on by the assessee
1. Assessee company is engaged in the hotel business and for the year under consideration it declared total income of Rs.1.45 crores whereas the assessment was completed by determining the income at Rs.2,68,16,871
2. It may be noticed that though the return was processed originally under section 143(1) of the Act, it was later on taken-up for scrutiny in CASS on the ground that the A.O. should examine disallowance under section 14A of the Act
3. While examining the books of account etc., the A.O. noticed that the assessee debited a sum of Rs.1,22,78,611 towards loss on sale of machinery
4. When called upon to explain the admissibility of such loss the assessee contended that it has purchased certain property and plant and machinery belonging to M/s. Shyam Vinyls Ltd., from the Official Liquidator, High Court of A.P; the property consists of land admeasuring 7.75 acres with building, civil works and plant and machinery
5. According to the A.O. the property has no nexus to the assessee’s business whatsoever
6. The said company was in liquidation and the Official Liquidator issued a notice for sale quoting minimum upset price at Rs.273.50 lakhs for the land and building and Rs.290 lakhs for the plant and machinery, aggregating to Rs.527.50 lakhs
7. Assessee company made a consolidated offer of Rs.502 lakhs for the entire property which was accepted by the Official Liquidator and possession of the property was handed-over on 05.07.2007
8. Thereafter, the assessee company sold the entire machinery for a total consideration of Rs.1.72 crores and claimed loss of Rs.1.22 crores
9. It appears that, according to the assessee the value of plant and machinery is Rs.290 lakhs and a sum of Rs.4.78 lakhs was paid towards interest on belated payments of the said sum and thus, the total worked out to Rs.294.78 lakhs
10. Since the entire machinery was sold for a consideration of Rs.1.72 crores, the balance of Rs.1.22 crores was shown as loss against the income of its hotel business
11. The A.O. noticed that the assessee is in hotel business whereas M/s. Shyam Vinyls Ltd., was altogether in a different line of business and therefore, the purchase of machinery has no nexus with the assessee’s business; in fact it has not even brought the machinery into its books of account though possession was taken on 05.07.2007 and sold after more than one year after taking possession and hence, the loss cannot be treated as business loss
12. He also observed that the sole purpose of purchasing the property is only to acquire vast piece of land admeasuring 7.75 acres which is nothing but acquiring of capital asset
13. Thus, he concluded that any loss arising on sale of capital assets can be set off only against the capital gain. Since the assessee debited loss of Rs.1.22 crores the same was disallowed by the A.O. by specifically observing that it has no connection whatsoever with the business activity carried on by the assessee
14. Aggrieved Assessee moved to the CIT(A)
15. CIT(A) allowed the Appeal by observing that as per the memorandum and articles of association, assessee can indulge in any other activity other than hotel business, and sale of scrap is an ordinary fall-out of the hotel business and thus the same rule can be extended to the sale of plant and machinery in the scrap form and hence, the loss thereof, has to be allowed as set off against the income from hotel business
16. Aggrieved, Revenue is in appeal before the Tribunal
17. Honb. Tribunal reversed the order of the CIT(AO and decided the issue in favour of Revenue
The material presented before us nowhere indicate that the assessee was carrying on the activity of purchasing plant and machinery with a view to re-sale the same. The assessee participated in the tender for purchase of land and building and plant and machinery with the main purpose of acquiring the land which is a capital asset and in fact it was shown in the balance sheet as acquisition. Such being the case, plant and machinery cannot be said to have been purchased for the purpose of carrying on the business of purchase and sale of scrap since it is not even remotely connected to the main line of activity. Assessee has nowhere specified as to what is the price quoted towards plant and machinery at the time of offering its tender.
On the contrary, the facts indicate that the dominant object was to purchase the capital assets and in fact the assessee has merely quoted the lumpsum price which was accepted by the Official Liquidator. Thus the bifurcation of value between the plant and machinery and land and building is not backed/supported by any evidence on record. Even the petition filed before the Hon’ble High Court of Judicature of A.P. with regard to fixation of value for the plant and machinery and for land and building separately also indicate that at best the assessee seeks to adopt a proportionate value (see page 29 of the paper book) since the O/o. Official Liquidator accepted the quotation by merely stating that the assessee has given a consolidated offer of Rs.502 lakhs for purchase of land, building and plant and machinery.
The land and machinery was kept idle for more than one year but the assessee did not choose to obtain any report from the registered valuer with regard to the value of such plant and machinery which also indicate that the price now sought to be fixed at Rs.294 lakhs is only an imaginary value so as to claim deduction from the business income overlooking the fact that it was purchased as an asset and reflected in the balance sheet as such.
In our considered opinion, the Ld. CIT(A) has not given any reasons to accept the contention of the assessee despite the fact that not even an iota of evidence is placed to support such contention. On the other hand, the circumstances, categorically indicate that there is no nexus between purchase of land, building and plant and machinery on one hand and the hotel business being carried on by the assessee for the past two decades. On a conspectus of the matter, we of the firm view that the order passed by the Ld. CIT(A) is contrary to law and facts of the present case and therefore, deserves to be set aside and we direct accordingly. In the result, we set aside the order passed by the Ld. CIT(A) and uphold the view taken by the A.O, since the loss claimed by the assessee cannot be treated as revenue loss or business loss.
Cases Referred to