2004 (4) TMI 260 - AT - Income Tax

Written off advance loan can be considered as expenditure - Nature of expenditure Revenue or Capital - difference of opinion between the Accountant Member and Judicial Member - Third Member Order - Whether, the assessee was entitled to deduction on being advances made to two other companies, in computation of profits of business? HELD THAT - Judicial Member held that, As the financial position of the subsidiary company had gone weak therefore, considering the pros and cons as a businessman the amount was written off. Thus, the write off of advance to M/s. IPS deserves to be allowed. Accountant Member held that the order of the learned CIT(A) disserves to be confirmed i.e. advances were not trade debts but capital assets, resulting in a capital loss, not a revenue loss. Third Member - In my opinion, the factum of advancing the loan cannot be considered to be expenditure incidental to the carrying of business. International Power Semi Conductors Ltd. and Siltronics (India) Ltd. were two different separate legal entities. Just because they were the subsidiaries of the assessee company, it cannot be said that the business of these two companies was the business of the assessee itself. It is sine qua non to consider here the nature of advantage, which the assessee has derived, in commercial sense by advancing the funds to the subsidiaries. It is evident that the purpose was to earn interest. This is the immediate advantage the assessee is deriving. Rescuing the subsidiary companies from the financial crisis is the other reason. This advantage is also in the capital field. As such, the loss was also occasioned in the capital field. Having regard to the facts and after considering the precedents available on the point, I am inclined to concur with the decision of the learned Accountant Member on this issue. Final Decision The appeal of the assessee was dismissed, and the addition was confirmed as a capital loss, not deductible in computation of business profits.

Summary

Issues Involved:
1. Confirmation of addition of Rs. 25,07,833 being the amount of advance written off.
2. Disallowance of Rs. 6,57,606 u/r. 6D of the Income-tax Rules, 1962.

Summary:

Issue 1: Confirmation of addition of Rs. 25,07,833 being the amount of advance written off

The appellant company wrote off advances amounting to Rs. 25,07,833 made to two companies, International Power Semi Conductors Ltd. (IPS) and Siltronics (India) Ltd. (SIL), which went into liquidation. The Assessing Officer disallowed the claim, concluding that the advances were made for non-business purposes. The CIT(A) applied section 37(1) and held that the advances were not trade debts but capital assets, resulting in a capital loss, not a revenue loss. The appellant argued that the advances were business losses, citing various case laws. The Tribunal, after considering the facts and precedents, allowed the write-off of advances to IPS and SIL as business losses.

However, the Accountant Member disagreed, emphasizing that the assessee was not engaged in money lending and the advances were capital losses. The matter was referred to a Third Member, who concurred with the Accountant Member, concluding that the advances were not deductible as business losses.

Issue 2: Disallowance of Rs. 6,57,606 u/r. 6D of the Income-tax Rules, 1962

The assessee did not press this ground, and it was dismissed accordingly.

Final Decision:

The appeal of the assessee was dismissed, and the addition of Rs. 25,07,833 was confirmed as a capital loss, not deductible in computation of business profits. The disallowance of Rs. 6,57,606 u/r. 6D was also dismissed as not pressed.