1997 (4) TMI 8 - SC - Income Tax

Business of the assessee-company is the holding of investments & if with reference to the business of holding investments any expenditure had been incurred that could have been allowed as deduction. The expenditure incurred in payment of managerial remuneration to the directors of the subsidiary companies cannot be said to be expenditure incurred in carrying on the business - Hence HC has rightly proceeded on the basis that there must be a nexus between expenditure and business of the assessee

Issues Involved:
1. Valuation of shares for capital gains tax purposes.
2. Applicability of the proviso to section 12B(2) of the Indian Income-tax Act, 1922.
3. Deductibility of losses incurred due to standing guarantee for a subsidiary.
4. Deductibility of remuneration paid to directors of subsidiary companies.

Issue-wise Detailed Analysis:

1. Valuation of Shares for Capital Gains Tax Purposes:
The primary issue in Tax Case No. 160 of 1969 and questions Nos. 1 and 2 in Tax Case No. 239 of 1971 was whether the valuation of shares for the purpose of capital gains tax was correctly upheld by the Income-tax Officer. The Income-tax Officer had adopted a break-up value method as on January 1, 1954, rather than the sale prices fixed by the Company Law Administration. The Tribunal and the High Court found that the method adopted by the Income-tax Officer was proper, but the High Court ultimately ruled in favor of the assessee by stating that the first proviso to section 12B(2) was not applicable as the sales were not effected with the object of avoiding or reducing tax liability. The Supreme Court upheld this view, affirming that the finding did not suffer from any legal infirmity.

2. Applicability of the Proviso to Section 12B(2):
The High Court observed that the first proviso to section 12B(2) of the 1922 Act was not applicable since the sales were not made with the object of avoiding or reducing tax liability. The Tribunal had called for a specific finding on this point from the Appellate Assistant Commissioner, who concluded that the sales were forced due to statutory requirements and not motivated by tax avoidance. The High Court and subsequently the Supreme Court upheld this finding, affirming that the proviso could not be invoked in this case.

3. Deductibility of Losses Incurred Due to Standing Guarantee for a Subsidiary:
Questions Nos. 4, 5, and 6 in Tax Case No. 239 of 1971 dealt with the losses sustained by the assessee on account of standing guarantee to Sembiam Saw Mills (Private) Ltd. The Tribunal had allowed the deduction of these losses, stating that the guarantee was given in the course of the assessee's business. The High Court affirmed this view, noting that the assessee's business included furnishing guarantees to its subsidiaries. The Supreme Court found no legal infirmity in this judgment and upheld the High Court's decision, affirming that the losses were allowable as a deduction in the year they were ascertained, which was the assessment year 1962-63.

4. Deductibility of Remuneration Paid to Directors of Subsidiary Companies:
Question No. 3 in Tax Case No. 239 of 1971 involved the deductibility of sums paid by the assessee to directors of its subsidiary companies. The High Court held that these payments were not deductible under section 10(2)(xv) of the 1922 Act or section 37 of the 1961 Act as they were not incurred wholly and exclusively for the business of the assessee-company. The High Court reasoned that the expenditure was aimed at taking the subsidiary out of an inconvenient situation due to statutory changes and not for the direct benefit of the assessee-company's business. The Supreme Court upheld this view, stating that there was no direct and immediate connection between the expenditure and the business of the assessee-company, and thus, the expenditure was not allowable as a deduction.

Conclusion:
The Supreme Court dismissed Civil Appeals Nos. 139 to 142 of 1980 filed by the Revenue and Civil Appeals Nos. 7 to 11 of 1980 filed by the assessee-company, affirming the High Court's judgment on all issues. No order as to costs was made.

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