Rajkumari Agarwal Vs ACIT (ITAT Jaipur)
Mercedes in the Balance Sheet, Personal in Use: ₹20.67 Lakh Capital Loss Denied
The Jaipur ITAT upheld the disallowance of ₹20,67,120 claimed as long-term capital loss on the sale of a Mercedes car, holding that the vehicle was a personal effect excluded from the definition of “capital asset” under Section 2(14).
The Tribunal rejected the contention that showing the car under fixed assets in the balance sheet, coupled with the absence of any depreciation claim, automatically made the loss allowable.
The decisive consideration was the purpose for which the car was held and used. The assessee had herself treated its expenses as personal and confirmed that position during assessment.
Car Sale Loss Was the Sole Assessment Adjustment
The assessee filed her return for AY 2023-24 on 31 July 2023, declaring total income of ₹4,49,75,500.
A search had been conducted on the Derewala & Associates Group on 2 February 2023, and jurisdiction over her case was subsequently assigned to the Assessing Officer.
The assessment was completed under Section 143(3) on 29 March 2025, determining total income at ₹4,70,42,620. The sole adjustment was the disallowance of the ₹20.67 lakh capital loss claimed on the Mercedes car.
The dispute therefore concerned whether the vehicle qualified as a capital asset capable of generating a recognised capital loss.
Assessee’s Own Treatment Established Personal Character
The Assessing Officer found that no depreciation had ever been claimed on the car.
Further, car loan interest of ₹32,614 and repairs and maintenance expenditure of ₹68,404, although debited to the profit and loss account, had been voluntarily disallowed by the assessee as personal expenditure in her computation of income.
In her reply dated 18 December 2024, she reaffirmed that the car-related expenditure had been disallowed because it was personal.
The officer consequently treated the vehicle as a personal effect and rejected the capital-loss claim. The CIT(A) confirmed this conclusion, holding that the actual use and treatment of the asset were decisive, rather than its presentation in the balance sheet.
Fixed-Asset Classification Did Not Settle Tax Character
The assessee argued that she was engaged in real estate and property development and that the Mercedes appeared under fixed assets in her books.
She also contended that, since neither depreciation nor expenditure had been claimed, the loss should be treated as a long-term capital loss.
The Tribunal disagreed. Section 2(14) excludes movable property held for personal use, subject to specified exceptions such as jewellery and works of art. A motor car does not fall within those exceptions.
An asset held and used personally does not lose that character merely because it is recorded as a fixed asset. Accounting classification cannot override the established personal use of the vehicle.
Supreme Court’s Personal-Effects Test Applied
The Tribunal relied on H.H. Maharaja Rana Hemant Singhji v. CIT, 103 ITR 61 (SC), which explained the connection required between an article and the assessee’s personal use for it to qualify as a personal effect.
Applying that reasoning, the Bench held that a motor car maintained and used for the assessee’s personal purposes answered the description.
The conclusion rested on the cumulative facts: the absence of depreciation, the affirmative disallowance of car expenses as personal, and the assessee’s statement before the CIT(A) that there was no business activity, indicating that the vehicle had not been put to business use.
Thus, the Tribunal relied on the assessee’s conduct and admissions, rather than merely inferring personal use from an omitted depreciation claim.
Authorities on Business Assets Were Distinguished
The assessee relied on CIT v. Santosh Structural & Alloys Ltd., 20 taxmann.com 501 (P&H) and Share Aids (P.) Ltd. v. ITO, 124 taxmann.com 256 (Madras).
The Tribunal distinguished both decisions.
As described in the order, Santosh Structural concerned plant and machinery of a manufacturing business and the operation of Section 50 where depreciation had not been claimed. Share Aids concerned business assets, including motor vehicles, sold during a company’s winding up.
In those cases, the assets’ character as business or capital assets was established. The controversy concerned how to compute the resulting gain or loss.
Here, the earlier question was whether the personally used car was a capital asset at all. Decisions concerning computation could not overcome the personal-effects exclusion.
No Capital Gain Means No Capital Loss
The Tribunal emphasised the neutral consequence of its conclusion. Since the car was a personal effect, a profit on its sale would not attract capital gains, and a loss would likewise not qualify as a capital loss.
It upheld the ₹20,67,120 disallowance and dismissed the appeal.
Author’s Comments
The decision highlights the need to determine an asset’s tax character before computing its sale result. Its appearance in a balance sheet is relevant evidence, but cannot establish capital-asset status where the surrounding facts demonstrate personal use.
Equally, non-claim of depreciation does not automatically make a sale loss a long-term capital loss. That question arises only after the asset qualifies for capital-gains treatment.
The ruling is particularly clear because the assessee had expressly classified the running costs as personal. It should therefore be applied by examining actual use, admissions and supporting records, rather than treating every car on which depreciation was not claimed as a personal effect.
Cases Discussed
- H.H. Maharaja Rana Hemant Singhji v. CIT [1976] 103 ITR 61 (Supreme Court) — relied upon for the test that personal effects are articles intimately and commonly used by the assessee.
- CIT v. Santosh Structural & Alloys Ltd. [2012] 20 taxmann.com 501 (Punjab & Haryana High Court) — distinguished as concerning plant and machinery whose business/capital-asset character was established and the operation of Section 50.
- Share Aids (P.) Ltd. v. ITO [2021] 124 taxmann.com 256 (Madras High Court) — distinguished as concerning depreciable business assets sold during winding up and computation under Sections 41(2) and 50.
FULL TEXT OF THE ORDER OF ITAT JAIPUR
1. This appeal by the Assessee is directed against the order of the learned Commissioner of Income Tax (Appeals), Jaipur-4 [hereinafter referred to as “the learned CIT(A)”] dated 10.02.2026 passed under section 250 of the Income Tax Act, 1961 (hereinafter referred to as “the Act”), arising out of the assessment order dated 29.03.2025 passed by the Assessing Officer (hereinafter referred to as “the AO”) under section 143(3) of the Act for the assessment year 2023-24.
2. The grounds of appeal raised by the Assessee before us in the memorandum of appeal in Form No. 36 read as under:
1. In the facts and in the circumstances of the case and in law, the Learned CIT(A) has erred in confirming the addition of Rs. 20,67,120/- which was made by the learned AO by disallowing of long term capital loss on sale of car.
2. The assessee craves your indulgence to add amend or alter all or any grounds of appeal before or at the time of hearing.
3. Briefly stated, the facts of the case are that the Assessee, an individual, filed her return of income for the year under consideration on 31.07.2023 declaring a total income of Rs 4,49,75,500. A search and seizure action under section 132 of the Act was carried out on 02.02.2023 on the members of the Derewala & Associates Group, of which the Assessee is a member, pursuant to which jurisdiction over the case was assigned to the AO under section 127 of the Act. The AO completed the assessment under section 143(3) of the Act vide order dated 29.03.2025 at a total income of Rs 4,70,42,620, after making a single disallowance of Rs 20,67,120 by declining the long term capital loss claimed by the Assessee on the sale of a motor car.
4. The disallowance arises in the following manner. In her return of income the Assessee had claimed a long term capital loss of Rs 20,67,120 on the sale of a Mercedes car. The AO found that no depreciation had ever been claimed on the car; that the car loan interest of Rs 32,614 and the repairs and maintenance of Rs 68,404 debited in the profit and loss account had been suo motu disallowed by the Assessee herself as personal expenditure in the computation of income; and that the Assessee had, in her reply dated 18.12.2024, confirmed that the car related expenses had been disallowed as personal expenditure. On these facts the AO held that the car was held for personal use and was, therefore, a personal effect under section 2(14) of the Act and not a capital asset. The operative finding of the AO, in paragraph 6.2 of the assessment order, reads as under:
Accordingly, it is held that car was not a capital asset and so long term capital loss claimed by assessee on sale of car amounting to Rs. 20,67,120/- is hereby disallowed and added to income.
5. Before the AO, and thereafter before the learned CIT(A), the Assessee contended that the car was a capital asset. Her submission, as recorded in paragraph 6.1 of the assessment order, was as under:
We would like to submit that the assessee is engaged in business of real estate and property development. In books of accounts the assessee is having closing stock of real estate was Rs. 5,13,31,304/-. The Mercedes Car was purchased by the assessee and no depreciation was claimed prior to sale of the car. Since it was capital assets hence the capital loss claimed by the assessee on sale of Mercedes car is allowable under the head capital gains.
6. The learned CIT(A) considered these submissions and confirmed the disallowance. The learned CIT(A) held that the decisive factor under section 2(14) of the Act is the actual use and treatment of the asset and not merely its reflection in the balance sheet, and that the Assessee had herself consistently treated the car as a personal asset by disallowing all car related expenses as personal expenditure and by never claiming depreciation. The operative finding of the learned CIT(A), in paragraph 4.2 of the impugned order, reads as under:
In view of the above facts and legal position, I hold that the Mercedes car sold by the appellant was a personal effect and not a capital asset within the meaning of section 2(14) of the Income-tax Act, 1961. Consequently, no capital gain or capital loss can arise on its sale. Hence, the Assessing Officer was justified in disallowing the claim of long-term capital loss of Rs.20,67,120/-. The addition made by the AO is therefore confirmed.
7. Before us, the learned Authorised Representative (hereinafter referred to as “the learned AR”), reiterated the submissions made before the authorities below and pressed his case with some emphasis. He submitted, first, that the car stood reflected in the balance sheet under the head fixed assets and, therefore, constituted a capital asset; secondly, that the Assessee had claimed neither depreciation nor any expenditure on the car, which, according to him, shows that the asset was held as a capital asset and not exploited in any business; and thirdly, that where no depreciation has been claimed, the loss on the sale of the asset must be treated as a long term capital loss. In support, the learned AR placed reliance on the decision of the Hon’ble Punjab & Haryana High Court in CIT v. Santosh Structural & Alloys Ltd. [2012] 20 taxmann.com 501 (P&H) and on the decision of the Hon’ble Madras High Court in Share Aids (P.) Ltd. v. ITO [2021] 124 taxmann.com 256 (Madras), and submitted that the disallowance of the long term capital loss of Rs 20,67,120 ought accordingly to be deleted.
8. The learned Departmental Representative (hereinafter referred to as “the learned DR”) supported the orders of the authorities below. He submitted that the Assessee had, by her own conduct, treated the car as a personal asset by disallowing the entire car related expenditure as personal expenditure and by not claiming any depreciation, and that a motor car held for personal use falls within the exclusion of personal effects under section 2(14) of the Act, so that no capital loss can arise on its sale.
9. We have heard the rival contentions, perused the material available on record and considered the orders of the authorities below. The sole issue that arises for our consideration is whether the motor car sold by the Assessee is a capital asset within the meaning of section 2(14) of the Act, so as to give rise to an allowable long term capital loss of Rs 20,67,120, or a personal effect which stands excluded from that definition.
10. The answer to this question turns on the definition of capital asset in section 2(14) of the Act, which, in so far as it is relevant, excludes from the ambit of a capital asset the following:
1. personal effects, that is to say, movable property (including wearing apparel and furniture) held for personal use by the assessee or any member of his family dependent on him, but excludes—
(a) jewellery;
(b) archaeological collections;
(c) drawings;
(d) paintings;
(e) sculptures; or
(f) any work of art;
11. It is thus clear that movable property held for personal use by the assessee is a personal effect and stands excluded from the definition of a capital asset, save for the specified items such as jewellery and works of art, within which a motor car does not fall. The expression personal effects has been authoritatively construed by the Hon’ble Supreme Court in H.H. Maharaja Rana Hemant Singhji v. CIT [1976] 103 ITR 61 (SC), a matter arising from the State of Rajasthan, where it was held that the enumeration of the articles in the definition indicates that the Legislature intended to comprehend within personal effects only those articles which are “intimately and commonly used” by the assessee, that is to say, articles which are personally or individually used by the assessee. A motor car maintained and used for the personal use of the assessee answers this description and is, therefore, a personal effect. In construing the corresponding definition in section 2(4A) of the Indian Income-tax Act, 1922, which is in pari materia with section 2(14) of the Act, the Hon’ble Supreme Court observed as under:
The expression “personal use” occurring in clause (ii) of the above quoted provision is very significant. A close scrutiny of the context in which the expression occurs shows that only those effects can legitimately be said to be personal which pertain to the assessee’s person. In other words, an intimate connection between the effects and the person of the assessee must be shown to exist to render them “personal effects”. The enumeration of articles like wearing apparel, jewellery, and furniture mentioned by way of illustrations in the above-quoted definition of “personal effects” also shows that the legislature intended only those articles to be included in the definition which were intimately and commonly used by the assessee.
12. Applying this test to the facts before us, we find that the character of the car as a personal effect is established by the Assessee’s own conduct and admissions. The Assessee never claimed any depreciation on the car. The entire car related expenditure, namely car loan interest of Rs 32,614 and repairs and maintenance of Rs 68,404, was suo motu disallowed by the Assessee as personal expenditure in her own computation of income, a position she reaffirmed in her reply dated 18.12.2024. Before the learned CIT(A) she further stated that there was no activity in the business, meaning thereby that the car was not put to any business use. These are not findings thrust upon the Assessee; they are her own admissions, and they lead to the conclusion that the car was held for her personal use.
13. The only circumstance urged to the contrary is that the car was reflected in the balance sheet under the head fixed assets. In our considered view, that circumstance does not advance the Assessee’s case. What section 2(14) of the Act looks to is whether the movable property is held for personal use, and not the head under which it is classified in the books of account. An asset that is in fact held and used for personal purposes does not shed the character of a personal effect merely because it is carried in the balance sheet as a fixed asset. The accounting treatment cannot prevail over the admitted user of the asset.
14. The reliance placed by the learned AR on CIT v. Santosh Structural & Alloys Ltd. (supra) and Share Aids (P.) Ltd. (supra) is misplaced. Both decisions arise in an entirely different setting. Santosh Structural (supra) concerns the plant and machinery of a manufacturing concern and addresses the operation of section 50 of the Act, holding that an asset on which no depreciation was ever claimed does not form part of a block of assets, so that the gain on its transfer is long term and not short term. Share Aids (supra) likewise concerns depreciable business assets, being the motor vehicles and other assets of a company sold in the course of its winding up, and addresses the treatment of the resulting loss under section 41(2) read with section 50 of the Act. In each case the asset was indisputably a business or capital asset, and the only question was the mode of computing the gain or loss. Neither decision deals with, and neither is of any assistance upon, the anterior question that arises here, namely whether a motor car held for the personal use of the assessee is a capital asset at all, or a personal effect excluded from that definition by section 2(14) of the Act.
15. Nor does the circumstance that the Assessee claimed neither depreciation nor any expenditure on the car assist her case; if anything, it tells against her. In Santosh Structural (supra) and Share Aids (supra) the assets were admittedly business assets, and the absence or presence of a depreciation claim went only to the mode of computation. Here, by contrast, the Assessee did not merely omit to claim depreciation; she affirmatively disallowed the entire car related expenditure as personal in her own computation and stated that there was no business activity, so that the car was not used for any business. The very facts on which the learned AR relies are, therefore, the facts that establish that the car was held for personal use and is a personal effect. An asset that is not used for business, on which no depreciation is claimed and whose whole running cost the owner treats as personal, is not converted into a capital asset yielding an allowable capital loss merely by being carried in the balance sheet as a fixed asset. To accept the contention would lead to the incongruous result that an assessee could claim a capital loss on a purely personal asset, whereas a gain on the sale of the same asset would escape capital gains altogether. The scheme of section 2(14) of the Act does not admit of such a result.
16. It follows that, since the car is a personal effect and not a capital asset, its transfer does not give rise to any capital gain or capital loss, and the long term capital loss of Rs 20,67,120 claimed by the Assessee is not an admissible loss. We may add that this conclusion is neutral in its operation: just as no capital gain would have been chargeable had the car been sold at a profit, no capital loss is admissible on its sale at a loss.
17. In view of the foregoing, we are of the considered opinion that the learned CIT(A) was justified in confirming the disallowance of the long term capital loss of Rs 20,67,120. We find no reason to interfere with the well reasoned order of the learned CIT(A). Ground No. 1 is, accordingly, dismissed.
18. Ground No. 2 is general in nature and seeks liberty to add, amend or alter the grounds of appeal. No such additional ground has been urged before us. This ground does not require any specific adjudication and is disposed of accordingly.
19. In the result, the appeal filed by the Assessee is dismissed.
Order pronounced in the open court on 28.09.2026
