Bombay High Court Rejects ₹56.79 Lakh Business-Loss Deduction On Sale Of Depreciable Assets, Holds Section 41(2) Limited To Power Undertakings
Bombay High Court Upholds Income Tax Tribunal’s View That CNG Cylinder Manufacturer Cannot Claim Section 41(2) Loss On Written-Down-Value Asset Block
Facts
Everest Kanto Cylinder Ltd., a listed manufacturer and exporter of CNG cylinders, filed its return for Assessment Year 2021–22 declaring income of ₹134.59 crore under Section 115JB and nil income under the normal provisions after setting off past losses. It claimed ₹56,79,598 as a business loss on sale of certain depreciable fixed assets, including assets within a block subject to written-down-value (WDV) depreciation. The Central Processing Centre disallowed the claim in its Section 143(1) intimation of 14 December 2022. The Commissioner (Appeals), by order dated 5 February 2024, sustained the disallowance, reasoning that sale proceeds reduce the WDV of the relevant block and an individual asset sale does not ordinarily yield a separately deductible business loss. The Income Tax Appellate Tribunal, Mumbai, dismissed the assessee’s appeal on 20 January 2025. The company challenged that decision in a Section 260A appeal before the Bombay High Court.
Issues
Whether loss of ₹56,79,598 on sale of depreciable fixed assets could be claimed as a business loss under Section 41(2) of the Income Tax Act, 1961, by a manufacturing enterprise applying the WDV/block-of-assets method; whether the Tribunal was right to confine that provision to eligible electricity-generation undertakings using straight-line depreciation; and whether decisions concerning Section 50 capital gains or set-off of brought-forward business losses altered the result.
Appellant’s Arguments
The assessee contended that it had sold assets below their WDV and that the shortfall represented a deductible business loss. It argued that the word “income” can include losses and that Section 41(2), when read alongside Sections 28, 29 and 50, supported business-loss treatment. Reliance was placed on Share Aids (P) Ltd. v. ITO (Madras High Court), Digital Electronics Ltd. v. Addl. CIT, PCIT v. Alcon Developers and decisions on deeming provisions and beneficial statutory interpretation. It further submitted that the Tribunal introduced the electricity-generation limitation although that precise ground had not been advanced before the Commissioner (Appeals) or by the Department at the hearing.
Revenue’s Arguments
The Revenue maintained that Section 41(2) is a charging provision addressing a limited excess of sale consideration over WDV, not a general deduction for losses on sale of assets. Under Section 43(6), the proceeds from assets sold within a depreciable block must be adjusted against the block’s WDV; an individual asset sale below its book value cannot automatically be debited as a business expense. It submitted that the taxpayer did not satisfy Section 32(1)(i), which governs eligible power-generation assets, and that cases permitting set-off against gains were factually distinct from the threshold question whether the claimed amount constituted an allowable business loss.
Analysis of the Law
Section 41(2), as presently enacted, applies to specified assets in respect of which depreciation is claimed under Section 32(1)(i). That depreciation route concerns eligible undertakings engaged in generation, or generation and distribution, of power that apply the straight-line method. The earlier, more general Section 41(2) was omitted from 1 April 1988 when block depreciation was introduced; its re-enactment with effect from 1 April 1998 was tailored to the power sector. For other taxpayers using the WDV system, Section 43(6) governs additions and reductions within an asset block. Section 50 prescribes capital-gains treatment for depreciable assets in the circumstances it specifies; it does not convert the claimed shortfall on each asset sale into an independent Section 41(2) business deduction.
Precedent Analysis
The Division Bench relied on CIT v. Rhodoen Silk Mills (P) Ltd., (2011) 332 ITR 330 (P&H), which recognised continued block-of-assets treatment where the block survived asset sales and additions. It rejected reliance on Digital Electronics Ltd. v. Addl. CIT, 2010 SCC OnLine ITAT 8532: that decision concerned adjustment of brought-forward business losses against income arising from disposal of business assets, rather than the creation of a deductible loss under Section 41(2). The assessee also cited Share Aids (P) Ltd. v. ITO, (2021) 124 taxmann.com 256 (Mad.), and PCIT v. Alcon Developers, (2021) 432 ITR 267 (Bom.); the Court did not treat either as displacing the statutory restriction governing the present claim.
Court’s Reasoning
Justices G. S. Kulkarni and Dr. Neela Gokhale traced the legislative history of Section 41(2) and its relationship with Sections 32(1)(i), 43(6), 50 and 50A. They accepted the Tribunal’s interpretation that the restored Section 41(2) provision has limited application to power undertakings claiming depreciation on the straight-line basis, whereas Everest Kanto manufactures CNG cylinders and claims depreciation on the WDV block method. For such a business, sales and additions are reflected in the computation of the block’s closing WDV rather than treated as standalone losses under Section 41(2). The Bench distinguished authorities concerning set-off of accepted business losses from the anterior question of legal entitlement to this particular deduction. Accordingly, the Tribunal’s central conclusion was legally correct.
Conclusion
The High Court answered the substantial question of law against Everest Kanto Cylinder Ltd. and in favour of the Revenue. It upheld the disallowance of the claimed ₹56,79,598 loss for Assessment Year 2021–22 and dismissed Income Tax Appeal (L.) No. 39 of 2026 without costs. The judgment does not state that every sale below the WDV of an individual asset generates a separately deductible revenue loss. Instead, it emphasises the restricted operation of Section 41(2) following the block-depreciation reforms and the need to apply the relevant WDV and capital-gains provisions to transactions involving assets within a depreciable block.
Case: Everest Kanto Cylinder Ltd. v. Deputy Commissioner of Income Tax, Circle 3(4) & Anr.
Court: High Court of Judicature at Bombay, Division Bench (Original Side)
Case Number: Income Tax Appeal (L.) No. 39 of 2026; 2026:BHC-OS:24152-DB
Bench: Justices G. S. Kulkarni and Dr. Neela Gokhale
Date: 5 November 2026 (reserved on 14 August 2026)
Result: Appeal dismissed, no costs; ₹56,79,598 loss disallowance sustained for A.Y. 2021–22.
