Income-tax---

----Business loss ---Assessee engaged in business of hire-purchase financing of trucks---Hire-purchasers making default in payment of stipulated instalments to assessee---Assessee taking repossession of vehicles---Vehicles at relevant time registered in names of hire-purchasers under S.24, Motor Vehicles Act, 1939---Assessee not owner of vehicles at time of repossessing them---Vehicles not stock-in-trade of assessee---Loss on revaluation of vehicles not allowable deduction---Indian Income Tax Act, 1961, Ss.28, 36(1)(vii) & 36(2).

The assessee-company derived income from hire-purchase financing of trucks. The assessee took repossession of the vehicles from the hire- purchasers since the hire-purchasers defaulted in paying the stipulated instalments to the assessee-company. In respect of the assessment years 1968-69 and 1969-70, the assessee-company claimed loss on the repossessed vehicles amounting to Rs.1,10,000 and Rs.10,000, respectively, and claimed deduction of the same as trading loss under section 28 of the Income Tax Act, 1961. The Income-tax Officer disallowed the claim of the assessee but the Appellate Assistant Commissioner accepted the claim of the assessee. The Tribunal found that the vehicles at the relevant time were registered in the office of the Regional Transport Authority in the names of the hirers and only on account of non-payment of instalments by the hire-purchasers, the assessee took repossession of the vehicles and that, therefore, the vehicles belonged to the assessee and formed part of its stock-in-trade till actually they were handed over to the hire-purchasers. The Tribunal arrived at the conclusion that though the assessee's business was that of financing trucks on hire-purchase basis, actually it was a money-lending business and as such any loss occasioned to the assessee on account of non-recovery of instalments financed by it would be a loss incidental to its money-lending business and, therefore, an allowable deduction under section 36(1)(vii) read with section 36(2) of the Income Tax Act, 1961. The Tribunal accordingly held that the loss caused to the assessee was not a trading loss deductible under section 28 of the Act, that, however, the assessee's claim for deduction carne within the purview of section 36(1)(vii) read with section 36(2) and that it was a bad debt which became bad in the previous year, i.e., the trucks in question constituted the capital asset of the assessee and the assessee was entitled to depreciation on the same. On a reference:

Held, that the vehicles in question were registered in the names of the hire-purchasers in accordance with the provisions of section 24 of the Motor Vehicles Act, 1939. Therefore, in the eye of law, the assessee was not the owner of the vehicles even at the time of repossessing the same. Hence, the vehicles could not be construed to be the assessee's stock-in-trade and, therefore, the question of any loss on revaluation of the said vehicles did not arise. Therefore, the assessee was not entitled to deduction of the loss in respect of the assessment years 1968-69 and 1969-70.

Srirangacharyulu (S.P.B.P.) v. C.I.T. (1965) 58 TIR 95 (AP) applied.

Ashok Kumar for the Commissioner.

JUDGMENT

This reference under section 256(1) of the Income Tax Act, 1961 (hereinafter referred to as "the Act"), is at the instance of the assessee.

The following questions of law have been framed:

"(1) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that the trucks in respect of which finances on hire purchase finance basis had been advanced by the assessee to the various persons did not constitute the assessee's stock-in-trade and as such there could be no loss on account of the revaluation of the said trucks?

(2) Whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that assessee's claim squarely fell to the considered under section 36(1)(vii) read with section 36(2) and that it was not a trading loss entitled to deduction under section 28?

(3) Whether, the Tribunal is justified in holding that the debts in question had not become bad during the accounting year under consideration and that the assessee was not entitled to a deduction of Rs.1,00,000 in respect of the assessment year 1968-69 and of Rs.7,924 in respect of the assessment year 1969-70?"

The controversy involved in the aforesaid reference relates to the allowability of two sums, viz., Rs.1,10,000 and Rs.10,000 towards the loss sustained by the assessee on account of repossessing vehicles in the assessment years 1968-69 and 1969-70, respectively.

The facts stated in the reference are that the assessee is a company and derives income from hire purchase financing of trucks. Its accounting years is the financial year. In the assessment year 1968-69, it is alleged that the company took into possession (vehicles given on hire). These vehicles had been taken on hire purchase from the company by the persons shown in the chart given below, but since those persons defaulted in paying the stipulated instalments to the assessee-company, therefore, the company had taken possession of the vehicles.

Vehicles repossessed in the accounting year 1967-68 (assessment year 1968-69).

Similarly, during the accounting period corresponding to the assessment year 1969-70, it is alleged that the following vehicles were taken into possession by the assessee-company on account of default in payment by the hire purchasers detailed in the chart given below:

Vehicles repossessed in the accounting year 1968-69 (assessment year 1969-70)

Thus, the assessee-company estimated the possible loss on the above repossessed vehicles to the sum of Rs.1,10,000 in respect of the assessment year 1968-69 and Rs.10,000 in respect of the assessment year 1969-70 and accordingly these amounts were debited to the profit and loss account by the company and were claimed as legitimate expenditure.

The Income-tax Officer disallowed the aforesaid claim. However, in appeal, the Appellate Assistant Commissioner accepted the said claim of the assessee, against which the Revenue preferred an appeal before the Tribunal.

The Tribunal while allowing the appeal, came to the conclusion that at the relevant time the vehicles were registered in the office of the Regional Transport Authority in the names of the hirers and only on account of non- payment of instalments by the hire-purchasers, the assessee took repossession of the vehicles. Thus, according to the Tribunal, the vehicles belong to the assessee and form part of stock-in-trade till actually they were handed over to the hire-purchasers.

Thus, the short controversy was whether the assessee-company is the real owner of the vehicles and, if so, whether the vehicles constitute a part of the stock-in-trade or whether it is a case of money-lending simpliciter and the claim of the assessee for deduction of the losses under consideration could be allowed as a bad debt.

Learned counsel for the Revenue, Sri Ashock Kumar, submits that since the vehicles at the relevant time were registered in the names of the hire-purchasers, the vehicles cannot be taken into consideration as belonging to the assessee forming part of the stock-in-trade and, therefore, the claim as set up by the assessee is not maintainable being contrary to the provisions of section 36 read with section 28 of the Act.

This factual, position is not under dispute that the vehicles in question were registered in the names of the hire-purchasers in accordance with the provisions of section 24 of the Motor Vehicles Act, 1939. Thus, in the eyes of law, it must be deemed that the assessee was not the owner of the vehicles and this fact is based on documentary evidence and it is a finding of fact that the assessee was not the owner of the vehicles even at the relevant time of repossessing the same.

Thus, the legal position, which emerges is that the vehicles cannot be construed to be the assessee's stock-in-trade, and hence the question of any loss in revaluation of the said vehicles does not arise. In S.P.B.P. Srirangacharyuhu v. CIT (1965) 58 ITR 95 (AP), it is ruled that if the vehicle at the relevant time is registered in the name of the hire-purchasers, the same cannot be construed to be a part of the stock-in-trade of the financier and the financier assessee cannot take any advantage of the depreciated value of the vehicle.

The Tribunal has reached the conclusion that though the assessee's business is that of financing trucks on hire purchase basis, actually it is a money-lending business and as such any loss occasioned to the assessee on account of non-recovery of instalments financed by it, would be a loss incidental to its money-lending business, and, therefore, it must be allowed under section 36(1)(vii) read with section 36(2) as a bad debt.

Accordingly, the Tribunal, while setting aside the order of the Assistant Commissioner, held that the loss caused to the assessee is not a trading loss claiming deduction under section 28 of the Act. However, according to the Tribunal, the assessee's claim comes under section 36(1)(vii) read with section 36(2) of the Act and accordingly benefit was given to the assessee holding that it is a bad debt and that debt became bad in the previous year, i.e., the trucks in question constituted the capital asset of the assessee and are entitled to get depreciation on the same.

However, since the legal position as discussed above emerged that the vehicles cannot be construed to be the assessee's stock-in-trade, therefore, the question of any loss in revaluation of the said vehicles does not arise, and S.P.B.P. Srirangacharyuhu (1965) 58 ITR 95 (AP), applies with full force since the vehicles at the relevant time were registered in the names of the purchasers.

Thus, from the discussion aforesaid, the assessee is not entitled to deduction in respect of the assessment years 1968-69 and 1969-70.

This being so, the reference is answered in the affirmative and against the assessee.

M.B.A./1866/FCReference answered in affirmative