Loss Occurred On Fixed Deposits Due To Bank Liquidation Can't Be Treated As Business Loss For Deduction U/S. 28 Income Tax Act: Telangana HC

The Telangana High Court has held that loss incurred on fixed deposits due to bank liquidation cannot be treated as 'business loss' for the purpose deduction under Section-28 of the Income Tax Act.

The Court was considering an appeal under Section 260A of the Income Tax Act, 1961 against denial of deduction on fixed deposits on the ground that the same is a trading loss or bad debt under Sections 27 and 28 of the Act.

The division-bench of Chief Justice Alok Aradhe and Justice J. Sreenivas Rao observed, " It is pertinent to mention that the Assessing Officer after going through the evidence has specifically gave a finding that the loss suffered by the assessee is only capital loss and the same was confirmed by the appellate authority as well as tribunal. The said finding of the fact cannot be adjudicated in the appeal, while exercising the powers conferred under Section 260A of the Act, as the scope of the appeal is very limited."

The Petitioner was represented by Advocate Duvva Pavan Kumar while the Respondent was represented by Senior Standing Counsel J.V. Prasad.

The assessee who was engaged in the business of sale of electrical goods, money lending and dealing in shares and mutual funds filed his returns of income on 08.10.2002 for the assessment year 2002-2003 declaring loss of Rs.24,74,584/- on account of the fact that fixed deposits with Krishi Bank having been lost on account of liquidation of the said Bank. He claimed the amount as deduction on the ground that the same is a trading loss or bad debt under Sections 27 and 28 of the Act. However, the same was disallowed on the ground that the said amount constitutes a capital loss. Aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) but the same was dismissed. Thereafter, the assessee filed an appeal before the Income Tax Appellate Tribunal in which it was 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.

Counsel for the Assessee submitted that he was engaged in the business of dealing in shares as well as mutual funds and money lending and therefore the loss, which was sustained by the assessee, was incidental to carrying on his business and should be deducted in computing the profits. Reliance was placed on cases where the amount was lost in the course of business on account of misappropriation and it has been contended that in similar analogy the loss sustained by the assessee deserves to be treated as trading loss. He also placed reliance on Supreme Court's decision in 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 Ajitsingh vs. Commissioner of Income-Tax, Rajasthan, Commissioner of Income-Tax, Poona vs. P.V. Gore & Co.

Counsel for the Revenue, on the other hand submitted that the loss of the assessee cannot be termed as the loss in the course of the business. It was further submitted that the deposits made by the assessee were in the nature of fixed deposit investments, the assessing officer has rightly treated the same as capital loss and added back the same to total income.

The Court agreed with the Respondent's submission and observed,  "The principles laid down in the above said judgments are not applicable to the present facts and circumstances of the case on the ground that the deposits made by the 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 loss."

The appeal was accordingly dismissed.

Cause Title: M.Vinayak vs Dy Commissioner Of Income Tax

Appearances:

Appellant- Advocate Duvva Pavan Kumar, Advocate Y. Ratnakar

Respondent- Senior Standing Counsel Advocate J.V. Prasad

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