ITAT Jaipur on Capital Loss Claim for Personal Motor Car: Analysis of Rajkumari Agarwal Vs ACIT

1. Overview of the Ruling

The Jaipur Bench of the Income Tax Appellate Tribunal in Rajkumari Agarwal Vs ACIT (ITAT Jaipur) has held that a Mercedes car, which was admittedly used for personal purposes, is a “personal effect” excluded from the definition of “capital asset” under Section 2(14) of the Income Tax Act 1961.

Consequently, the assessee’s claim of long-term capital loss of ₹20,67,120 on sale of that Mercedes car was rejected and the disallowance was upheld. The Tribunal clarified that:

  • Merely showing the car as a fixed asset in the balance sheet does not determine its tax character; and
  • Non-claim of depreciation does not, by itself, convert a personal-use asset into a capital asset capable of generating a capital loss.

The decision underscores the principle that what matters is the actual use of the asset and how the assessee has treated it in her own records and submissions, not the mere accounting classification.

2. Factual Background

2.1 Return of Income and Assessment

  • The assessee, an individual, filed her return of income for AY 2023-24 on 31.07.2023 declaring total income of ₹4,49,75,500.
  • A search under section 132 was earlier conducted on 02.02.2023 on the Derewala & Associates Group, of which the assessee was a member.
  • Pursuant to this, jurisdiction over her case was transferred to the Assessing Officer under section 127.
  • Assessment was completed under section 143(3) vide order dated 29.03.2025, determining total income at ₹4,70,42,620.

2.2 Single Disallowance in Dispute

The only variation made by the Assessing Officer was:

  • Disallowance of long-term capital loss of ₹20,67,120 claimed on sale of a Mercedes car.

Thus, the entire appeal before the Tribunal revolved around whether the car qualified as a “capital asset” or was a “personal effect” excluded by Section 2(14).

3. How the Capital Loss Arose

In her return, the assessee reported a long-term capital loss of ₹20,67,120 on the sale of a Mercedes car. During assessment, the AO examined:

  • Whether the car was a capital asset within the meaning of Section 2(14); and
  • Whether the loss arising on its sale could be recognised under the head “Capital gains”.

The AO noted the following:

  • No depreciation had ever been claimed on the Mercedes car in prior years.
  • Car loan interest of ₹32,614 and repairs and maintenance of ₹68,404, which were debited in the profit and loss account, had been voluntarily disallowed by the assessee in her computation of income as personal expenditure.
  • In her reply dated 18.12.2024, the assessee explicitly confirmed that car-related expenses were disallowed because they were personal in nature.

On this basis, the AO concluded that the Mercedes car was held for personal use and therefore fell within the exclusion for “personal effects” under Section 2(14). The AO therefore disallowed the capital loss of ₹20,67,120 and added the amount back to income.

4. Arguments Before the AO and CIT(A)

4.1 Assessee’s Submissions

Before the AO, and subsequently before the Commissioner of Income Tax (Appeals) [CIT(A)], the assessee maintained that:

  • She was engaged in the business of real estate and property development and had closing stock of real estate of Rs. 5,13,31,304/- in her books.
  • The Mercedes car had been purchased and reflected under the head "fixed assets" in the balance sheet.
  • No depreciation had ever been claimed on the Mercedes car before it was sold.
  • Since the car was shown as a capital asset and no depreciation was claimed, the loss on its sale should be treated as allowable long-term capital loss under the head “Capital gains”.

4.2 Findings of the CIT(A)

The CIT(A) examined the material and confirmed the AO’s disallowance. The CIT(A) held that:

  • The determinative factor under Section 2(14) is whether the asset was held and used for personal purposes, not the mere representation in the balance sheet.
  • The assessee had consistently treated all expenses relating to the car as personal and had never claimed depreciation, which indicated that the car was not held as a business or investment asset.
  • On these facts, the Mercedes car constituted a personal effect and was therefore not a capital asset. Accordingly, no capital gain or capital loss could arise from its sale.

The CIT(A) thus upheld the addition of Rs. 20,67,120/-.

5. Contentions Before the ITAT

5.1 Assessee’s Side

The assessee’s Authorised Representative (AR) reiterated earlier arguments, essentially relying on three main propositions:

  1. Balance Sheet Disclosure as Fixed Asset
    • The Mercedes car was reflected in the balance sheet under “fixed assets”; hence, it should be treated as a capital asset.