Decided on February 28,1994



B.L. Chhibber, Accountant Member - (1.) IN this appeal by the assessee two grounds have been raised. Ground No. 1 reads as under : The learned CIT (Appeals) erred in disallowing the claim of loss of Rs. 80,000.
(2.) The assessee, a firm, is engaged in the business of manufacturing diesel Oil engine spare parts. It filed the return of income on 20-6-1986 showing income at Rs. 4,11,610. In the profit and loss account the assessee-firm debited an amount of Rs. 80,000 as capital loss on machinery. On enquiry the ACIT found that the assessee had placed an order for purchase of machinery worth Rs. 10,09,000 with M/s. Godrej & Boyce Mfg. Co. (P.) Ltd., at Bombay vide letter dated 17-7-1984. The said order was confirmed by the suppliers vide their letter dated 24-7-1984. The assessee was required to pay earnest money of Rs. 1,16,000 for confirmation of the order which was accordingly paid by the assessee. According to the terms of the order, the machinery was to be supplied in a period of 12 months. It appears that subsequently the assessee dropped its expansion plan and obviously the order for supply of machinery was cancelled as per telex message dated 18-4-1985. The assessee requested for return of advance payment of Rs. 1,16,000 for which the assessee entered into correspondence with the said suppliers. However the suppliers did not agree and finally intimated that they would deduct Rs. 80,000 as cancellation charges and refund the balance of amount which was accordingly refunded by them. The assessee claimed the cancellation charges of Rs. 80,000 as business loss or short-term capital loss. The ACIT held that it was neither a business loss nor a short-term capital loss. While negativing the assessee's claim for short-term capital loss in view of Section 71 (3), the ACIT took the view that there is no transfer of any capital asset which could give rise to short term capital loss. In the opinion of the learned ACIT in the absence of capital asset and transfer thereof, the question of computing the short-term capital loss and allowing deduction thereof under Section 71(3) did not arise. For this proposition, the ACIT placed reliance on the decision of Supreme Court in the case of Swadeshi Cotton Mills Co. Ltd. v. CIT [1967] 63 ITR 65 as well as on the decision of Punjab & Haryana High Court in the case of Dalmia Dadri Cement Ltd. v. CIT [1973] 90 ITR 297. As such the loss claimed by the assessee at Rs. 80,000 was disallowed by the ACIT. On appeal the learned CIT (Appeals) confirmed the action of the learned ACIT.
(3.) SHRI D.V. Lalchandani, advocate appearing for the assessee submitted that both the authorities below have erred in disallowing the loss of Rs. 80,000. According to the learned Counsel it ought to have been allowed as business loss as it was incurred during the normal course of business. Alternatively, he argued that it was a capital loss and ought to have been allowed under Section 71 (3) of the Act. The learned Counsel submitted that by advancing a sum of Rs. 1,16,000 to M/s. Godrej & Boyce Mfg. Co. (P.) Ltd. for the purchase of machinery, the assessee had got a right to acquire a capital asset and the extinguishment of such a right resulted into capital loss. According to the learned Counsel a capital asset is nothing but a bundle of rights and the learned authorities below erred in holding that the assessee did not get any right to acquire a capital asset. In support of his contention the learned Counsel relied upon Ahmed G.H. Ariff v. CWT [1970] 76 ITR 471 (SC), CIT v. Tata Services Ltd. [1980] 122 ITR 594 and CIT v. Vania Silk Mills (P.) Ltd. [1977] 107 ITR 300 (Guj.).;

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