Impairment Loss on Fixed Assets is a Capital Adjustment, Not a Revenue Deduction.

Issue

Whether an “impairment loss” or “abnormal loss” on fixed assets (wind turbines) damaged in a cyclone can be claimed as a revenue expenditure/deduction against business income, or if it must be treated as a capital adjustment in the block of assets.

Facts

An assessee-trust’s wind turbines were damaged in a cyclone and became non-functional.
The assessee decommissioned the assets, reclassified them as scrap, wrote down their book value to nil, and debited the “Impairment of assets” and “Abnormal loss” on spares to its Income & Expenditure account.
The assessee did not claim charitable exemption (under Section 11/12) on this activity but instead declared business income of ₹6.09 crores from it.
The Assessing Officer (AO) disallowed the deduction (of ₹10.42 crores) from the Income & Expenditure account, stating the loss was “capital in nature” and should be adjusted in the block of assets.

Decision

The court ruled in favour of the revenue (on the main issue of the deduction).
It held that since the assessee offered the income from this activity to tax as “business income,” the rules for business deductions apply.
The loss (Impairment/Abnormal loss) pertained to fixed assets and was therefore undeniably capital in nature.
The AO was correct to disallow the claim as a revenue deduction against business income.
However, the court clarified that the assessee is eligible to adjust this loss in the block of assets (e.g., as a discard/sale from the block), and the AO should be directed to allow this adjustment.

Key Takeaways

Capital vs. Revenue: An impairment loss or abnormal loss on a fixed asset is a capital loss, not a revenue expense deductible under Section 37(1).
Correct Tax Treatment: The correct treatment for such a loss is to adjust the value of the asset in the “block of assets” for depreciation purposes (i.e., reducing the Written Down Value by the scrap value).
Tax Status: When a trust offers income from an activity to tax as “business income,” it is assessed under the normal provisions for business, not the special provisions for charitable trusts (Sections 11/12).

Penalty for “Misreporting” (Sec 270A) Invalidated as AO Failed to Specify Grounds.

Issue

Whether a penalty for “misreporting of income” under Section 270A(9) is legally valid if the penalty order fails to specify the exact clause of Section 270A(9) under which the assessee’s claim falls.

Facts

Consequent to the disallowance of the impairment loss (as detailed in Case I), the Assessing Officer (AO) initiated penalty proceedings under Section 270A.
The AO alleged “underreporting of income in consequence of misreporting” and levied a penalty at the higher rate of 200%.
However, the penalty order failed to specify which of the specific sub-clauses of Section 270A(9) (e.g., “misrepresentation of facts,” “claim of expenditure not substantiated,” “gross negligence,” etc.) was applicable to the assessee’s case.

Decision

The court ruled in favour of the assessee and cancelled the penalty.
It held that the AO is required to specify the exact limb/clause of Section 270A(9) that has been contravened to justify the serious charge of “misreporting.”
A generic allegation of “misreporting” without specifying the exact nature of the offense is unjustified and legally invalid.
Since none of the specific clauses of Section 270A(9) were found to be attracted (or at least, were not specified in the order), the penalty for “misreporting” could not be sustained.

Key Takeaways

Specificity is Mandatory for Misreporting: “Misreporting” is a specific and serious charge. An AO cannot invoke the 200% penalty rate without pinpointing the exact sub-clause of Section 270A(9) that the assessee has violated.
Burden of Proof on AO: The burden is on the AO to prove how an incorrect claim (which might just be “underreporting”) crosses the line into “misreporting” as defined in the statute.
Debatable Claims are Not Misreporting: An incorrect claim, such as the one in Case I, which is a debatable point of law (capital vs. revenue), does not automatically constitute “misreporting” of income.
Vague Penalty Order is Invalid: A penalty order that is vague about the specific grounds for the charge is legally unsustainable.

IN THE ITAT AHMEDABAD BENCH ‘A’

Gujarat Energy Development Agency

Deputy Commissioner of Income-tax (Exemption)

Sanjay Garg, Judicial Member
and Narendra Prasad Sinha, Accountant Member

IT Appeal Nos. 1179 & 1180 (Ahd) OF 2025
[Assessment year 2017-18]

OCTOBER 16, 2025

Sanjay R. Shah, AR for the Appellant. Alpesh Parmar, CIT-DR for the Respondent.

ORDER

Narendra Prasad Sinha, Accountant Member. – These two appeals are filed by the assessee against the separate orders of the National Faceless Appeal Centre (NFAC), Delhi (in short “the CIT(A)”) dated 31.03.2025 & 19.03.2025, both for the Assessment Year (A.Y.) 2017-18, in the proceedings under Section 143(3) r.w.s. 263 of the Income Tax Act, 1961 (hereinafter referred to as ‘the Act’) and in the penalty proceeding under Section 270A of the Act, respectively.

2. As the two appeals pertain to the same A.Y., both the matters were heard together and are being adjudicated vide this common order for the sake of convenience. We will first take up the appeal of the assessee in respect of quantum addition.

ITA No.1179/Ahd/2025

3. The brief facts of the case are that the assessee is a registered charitable Trust under Section 12A of the Act run by the State Government of Gujarat. Its main activities are to diffuse knowledge in the various fields of energy and thereby to deal with the problems caused on account of rapid depletion of non-renewable resource. The assessee had filed its return of income for the A.Y. 2017-18 on 27.10.2017 declaring total income of Rs.6,09,65,540/-. The case was selected for scrutiny and the original order under Section 143(3) of the Act was passed on 20.12.2019 at total income of Rs.9,35,55,487/-, wherein addition of Rs.3,25,89,950/-was made on account of expenses out of earlier year’s accumulation as application of income. Thereafter, the Ld. CIT(Exemption) had set aside the assessment order under Section 263 of the Act to examine the following two issues: –

Impairment loss arising out of revaluation of assets amounting to Rs.9,35,16,377/-.

Claim of abnormal loss of Rs.1,07,10,358/- arising out of write off of spares.

The Assessing Officer had passed a fresh assessment order under Section 143(3) r.w.s. 263 of the Act on 29.03.2023 wherein addition of Rs.10,42,26,735/- was made in respect of the two issues on which the matter was set aside to the Assessing Officer by the Ld. CIT(E).

4. Aggrieved with the order of the Assessing Officer, the assessee had filed an appeal before the First Appellate Authority which was decided by the Ld. CIT(A) vide the impugned order and the appeal of the assessee was dismissed.

5. Now, the assessee is in second appeal before us. The following grounds have been taken in this appeal: –

“1.

The Hon’ble Commissioner of Income Tax (Appeals) [CIT(A)] erred in law and on facts by upholding the disallowance of Rs.9,35,16,377/- in respect of impairment loss and disallowance of Rs.1,07,10,358/- in respect abnormal loss suffered by the Appellant for the year under consideration.

The Hon’ble CIT(A) erred in law and on facts by upholding the aforesaid disallowances without appreciating the fact that the learned AO has made the said disallowances merely on the direction of the Hon’ble Commissioner of Income-tax (Exemption) u/s.263 without any independent finding of his own and without applying independent mind to the issues at hand.

The Hon’ble CIT(A) erred in law and on facts and failed to appreciate that the claim of allowance in respect of impairment loss and the claim of allowance in respect of abnormal loss are both allowable to the appellant, being a Trust, as the same have to be allowed while computing the commercial income of the Trust and the general provisions for allowability of expenditure while computing business income are not to be considered when the income is computed u/s.11 and 12 in respect of public charitable trust.

The Hon’ble CIT(A) further erred in law and on facts by upholding the order passed by the learned Assessing Officer despite the fact that the order passed under Section 263 of the Act, the very basis of the order passed by the Id. AO, was invalid, as it failed to comply with the requirement of including the Document Identification Number (DIN) as mandated by Circular 19/2019. Consequently, the order passed under Section 263 of the Act ought to be deemed non-existent and invalid, rendering the proceedings under Section 143(3) r.w.s. 263 also invalid and therefore, the order passed by the Ld. AO consequent to such proceedings is liable to be quashed.

Your Appellant reserve the right to add, alter, amend and/or withdraw any of the above Grounds of Appeal.”

6. Shri Sanjay R. Shah, Ld. AR of the assessee explained that the assessee had debited Rs.9,35,16,377/- to the Profit & Loss Account on account of book value of the assets (Wind Turbine Generators) written off due it to having become non-functional. He explained that the assessee had set up Wind Turbine Generators which had suffered heavy damage in the cyclone that hit Saurashtra coastal line on 09.06.1998 and that the generators were non-functional thereafter. The assessee had taken up the matter with the Ministry of New & Renewable Energy (MNRE) for disposal of Wind Turbine Generators and its spares, as those were setup with the assistance of MNRE in early nineties. The MNRE had granted approval to the assessee on 18.04.2017 for decommissioning of the demonstration wind farm and disposal of the non-performing assets. The Ld. AR submitted that as per the certificate of the Chartered Accountant, the written down value of the non-performing assets was assessed to ‘zero’, and, therefore, an amount of Rs.9,35,16,377/- was debited to the Income & Expenditure account for the year ending 31.03.2017 as “Impairment of the assets”. Further, another amount of Rs.1,07,10,358/-was also debited to Income & Expenditure Account as “Abnormal loss” in respect of the spares. The Ld. AR submitted that the assessee had suffered actual loss on account of Wind Turbine Generators and Spares/Equipments, which were decommissioned, dismantled and disposed of. Thus, the loss suffered by the assessee was genuine business loss and the same was allowable as deduction. The Ld. AR further submitted that no depreciation on Wind Turbine Generators and Spares were claimed since the time period when they became non-operational. The Ld. AR further submitted that the general provisions for allowability of expenses applicable to business income should not be applied when income is computed under Section 11 and 12 of the Act for a public charitable trust. In this regard, he relied upon certain judicial pronouncements as referred in the paper-book.

7. Per contra, Shri Alpesh Parmar, Ld. CIT-DR submitted that the amount debited by the assessee in the Income and Expenditure account in respect of “Impairment of assets” and “Abnormal loss” were on capital account and were not eligible for deduction under the provisions of the Income Tax Act. He submitted that the assessee had claimed depreciation on those assets so long as the Wind Turbine Generators were operational. Once the assets were damaged and no longer in use, no depreciation could have been claimed thereon. The Ld. CIT-DR submitted that as per the provisions of the Act, the balance written down value of the assets was required to be adjusted with the “block of assets” for the purpose of computation of income as per the provisions of the Act. He submitted that the capital losses that were debited to the account of the assessee, were rightly disallowed by the Assessing Officer. The Ld. CIT-DR further submitted that the provisions of Sections 11 & 12 of the Act were not applicable at all in the present case, as apart from being a Charitable Trust, the assessee was also carrying on business activity, the income from which was offered to tax in the Income-tax return filed by the assessee.

8. We have carefully considered the rival submissions. From the copy of Income Tax return filed by the assessee, it is found that the assessee has disclosed business income of Rs.6,09,65,537/- in its return. Apart from this business income, the assessee had also claimed deduction under Section 11 of the Act in respect of voluntary contribution in the form of “Grants from Government” and “Other donations”, which were applied for charitable purpose. It is found that the assessee had disclosed total voluntary contribution of Rs.1,17,18,89,144/- during the year which was applied towards charitable purpose and no taxable income was reported in this respect. From the disclosure as made by the assessee in the return of income, it is evident that the business income of Rs.6,09,65,537/- disclosed in the return was not subject to deduction under Sections 11 & 12 of the Act. Therefore, the contention of the assessee that the general provisions for allowability of expenses applicable to business income should not be applied, where income is computed under Section 11 and 12 of the Act for a public charitable trust, is found to be misleading. The assessee had not claimed any deduction u/s 11 or 12 of the Act in respect of business income earned by it. Therefore, the reliance of the assessee on various judicial pronouncements in respect of its contention that the claim in respect of impairment of asset and abnormal loss should have been computed as per the provisions of Sections 11 & 12 of the Act, has become otiose. The claim for deduction on account of impairment of assets and abnormal loss was not in respect of any charitable activity but it pertained to the business activity of the assessee, the income of which was offered to tax by the assessee itself. Therefore, the claim of deduction is required to be examined in accordance with the provisions of the Act as applicable to the business income.

9. The contention of the assessee is that the amount of Rs.9,35,16,377/- on account of impairment of assets of Rs.1,07,10,358/-in respect of abnormal loss on write off of assets, were genuine business loss and were correctly debited to the Income & Expenditure account in order to correctly work out the commercial income of the Trust. The Assessing Officer has not disputed that the amounts debited in respect of impairment of assets and write off of spares were not genuine business loss. The precise question to be considered is whether these losses were eligible for deduction under the provisions of the Income Tax Act. The assessee might have rightly debited these amounts to the Income and Expenditure account in order to correctly work out the book profit or commercial business income. However, the provision of section 37 of the Act specifically debars deduction of any expenditure of capital nature. Therefore, we have to examine whether these amounts debited to the Income & Expenditure account were in the nature of capital expenditure and were debarred from being claimed as deduction under the provisions of the Act.

10. It is found from the Schedule-H “Notes to the Accounts” that the Auditor had given following observation: –

2) During the Financial Year 2016-17 on the basis of Certificate received from Ravi Energie Pvt. Limited & on the basis of certificate given by Pipara & Company Chartered Accountants (Statutory Auditors) Agency had reclassified Fixed Assets amounting to Rs.9,35,16,377/- of Renewable Energy Division located at Lamba, okha-Madhi, Dhak & Tuna controlled & supervised by GEDA as Scrap and book value of the same had been written down to NIL by creating depreciation fund against fixed assets & writing off balance of spares amounting to Rs.1,07,10,358/-classified as currents assets as on 31.07.2016. [Emphasis supplied]

It is evident from above Notes that the amount of Rs.9,35,16,377/- debited in the Income & Expenditure Account as impairment of assets was actually fixed assets written off during the year as scrap. The balance of spares amounting to Rs.1,07,10,358/- debited to the account as abnormal loss, was also on account of fixed assets only. These claims pertaining to the fixed assets were clearly capital in nature. The assets were acquired in the nineties and the assessee had already claimed depreciation thereon, till the time they were operational. The assessee did not claim any depreciation since the time they were damaged in the cyclone, as they were no longer in use. As per the provisions of the Act, any asset on which depreciation has been claimed by the assessee, cannot be claimed as deduction as revenue expenditure. The assessee was required to adjust the written down value of the “fixed assets written off” in the “Block of Assets” only. These losses could not have been claimed as business expense under the provisions of the Act. Even the Auditor had certified that the impairment of loss of Rs.9,35,16,377/- was required to be written down by creating depreciation fund against the fixed assets and this was not required to be debited to the Income & Expenditure Account. Further that the spares written off were also in respect of fixed assets only.

11. In view of the above facts, the claim for deductions in respect of the “Impairment of Assets” and write off of “Abnormal loss” on account of spares, pertained to fixed assets, and being inadmissible were rightly disallowed by the Assessing Officer. The assessee, however, was eligible to adjust these amounts in the block of assets, which should be allowed by the Assessing Officer. The Assessing Officer is directed to allow the depreciation to the assessee after adjusting these amounts in the block of assets. The disallowance of “Impairment of Assets” of Rs.9,35,16,377/-and “Abnormal loss” on account of the spares of Rs.1,07,10,358/-, as made by the AO, is upheld. The grounds raised by the assessee in this respect are accordingly dismissed.

12. The next objection of the assessee is against non-issue of Document Identification No. (DIN) in the order under Section 263 of the Act passed by the CIT. No argument was taken by the Ld. AR in respect of this ground. Hence, the ground taken by the assessee is dismissed as not pressed.

13. In the result, the appeal of the assessee in ITA No.1179/Ahd/2025 is dismissed.

ITA No.1180/Ahd/2025

14. Now we will take up the appeal filed by the assessee against the penalty order. The assessee has taken the following grounds in this appeal: –

“1.

The Commissioner of Income Tax (Appeals) [CIT(A)] erred both in law and on facts by confirming the penalty of Rs.7,40,73,908/- levied under Section 270A of the Income Tax Act, 1961 (“the Act”) by the learned Assessing Officer.

Without prejudice to the above, the learned CIT(A) erred in law and on facts by confirming the penalty on the wrong premise that the appellant had not filed any appeal against the quantum order passed u/s.143(3) r.w.s.263 of the Act thereby implying that it had accepted addition made in the quantum orders so passed without appreciating the fact that the appellant had in fact preferred an appeal against the order passed under section 143(3) r.w.s. 263 of the Act on 16.12.2023 and the same was duly intimated to the learned CIT(A) during the course of the proceedings before him. Thus, the order u/s.250 has been passed without consideration of the submission filed by the appellant as well as on wrong assumption of facts that the quantum appeal is not filed and without affording opportunity to the Appellant to file submissions on merits of the case, and thus, passing the order in violation of principles of natural justice.

Based on the facts and circumstances of the case mentioned above, the order levying the penalty under Section 270A is legally unsustainable and therefore, the order passed by the learned CIT(A) ought to be quashed and penalty of Rs.7,40,73,908/- confirmed by the learned CIT(A) be deleted.

Even on merits of the case, the learned CIT(A) failed to appreciate that the learned Assessing Officer has not specified any limb u/s 270A(9) due to which he alleges that there was misreporting of income and levies penalty for underreporting of income as a consequence of misreporting of income as envisaged u/s 270A(8), and thus, levies penalty at the rate of 200%. It is submitted that without recording finding as to for which default u/s 270A(9), the case of the Appellant is construed as that of misreporting of income, the penalty levied u/s.270A at the rate of 200% for underreporting of income as a consequence of misreporting of income cannot be sustained and the same may please be deleted.

Without prejudice to any of the foregoing, the learned CIT(A) erred in confirming penalty at the rate of 200% of the tax sought to be evaded when the case of the Appellant can also not be considered to be a case of underreporting of income as envisaged u/s 270A(6) of the Act since the Appellant had provided plausible explanation for its claim of deduction for impairment of loss arising out of revaluation and deduction in respect of abnormal loss during the course of assessment proceeding. It is submitted that in view of these facts even the penalty at the rate of 50% in respect of underreported income is also not exigible much less for misreporting of income, for which penalty at the rate of 200% has been levied by the learned AO and confirmed by learned CIT(A). It is submitted that it be so held now and the same may please be deleted.

Your Appellant reserve the right to add, alter, amend and/or withdraw any of the above Grounds of Appeal.”

15. Shri Sanjay R. Shah, Ld. AR of the assessee submitted that the Assessing Officer had initiated penalty proceeding under Section 270A of the Act for under-reporting of income. However, the penalty under Section 270A of the Act was imposed for misreporting of income, which was not correct. He submitted that there was no misreporting of income by the assessee and that all the relevant facts were already brought on record. He further submitted that the Assessing Officer did not specify as to which default as mentioned under Section 270A(9) of the Act was attracted in the present case, for misreporting of income. The Ld. AR submitted that considering the facts of the case that the assessee had provided plausible explanation for its claim of deduction for impairment of assets as well as for abnormal loss, no penalty under Section 270A of the Act was called for.

16. Per contra, Shri Alpesh Parmar, Ld. DIT-DR supported the orders of the lower authorities.

17. We have considered the rival submissions. The Assessing Officer in the assessment order under Section 143(3) read with Section 263 of the Act had initiated penalty proceedings under Section 270A for “underreporting of income which is in consequence of misreporting of income”. In the penalty order under Section 270A of the Act also, the Assessing Officer had levied penalty for “under-reporting of income which is in consequence of misreporting thereof”. As per the provisions of Section 270A(7) of the Act, penalty is required and levied at the rate of 50% for underreporting of income. However, in the case of misreporting of income, the penalty is imposed at the rate of 200% of the underreported income. In the present case, the Assessing Officer had computed the penalty at the rate of 200%. Thus, the penalty was imposed in the present case for misreporting of income and not for underreporting of income. As per the provisions of Section 270A(9) of the Act, misreporting of income is attracted in the following cases :-

(9) The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:—

(a)

misrepresentation or suppression of facts;

(b)

failure to record investments in the books of account;

(c)

claim of expenditure not substantiated by any evidence;

(d)

recording of any false entry in the books of account;

(e)

failure to record any receipt in books of account having a bearing on total income; and

(f)

failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.

18. In view of the above specific provision, the Assessing Officer, while imposing the penalty under Section 270A of the Act for misreporting of income, was duty bound to specify as to which specific clause of Section 270A(9) of the Act was attracted in the present case. The Assessing Officer had not given any finding in this regard either in the assessment order or in the penalty order. From the facts of the case as already discussed earlier, we do not find that any of the above clauses were attracted in the present case. The assessee had neither misrepresented or suppressed any fact nor claimed any expenditure which was not supported by any evidence. There was no record of any false entry in the books of account. Considering the specific facts of the case as already discussed earlier, none of the clauses of Section 270A(9) of the Act are found attracted in the present case and we do not find it to be a case of misreporting of income. Therefore, the penalty imposed by the Assessing Officer under Section 270A of the Act for misreporting of income, is cancelled.

19. In the result, the appeal of the assessee in ITA No.1180/Ahd/2025 is allowed.

20. In the final result, the appeal filed by the assessee in ITA No.1179/Ahd/2025 is dismissed while the appeal of the assessee in ITA No.1180/Ahd/2025 is allowed.