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2009 (3) TMI 227 - AT - Income TaxClaim for loss suffered on loan advance - business loss u/s. 28 r/w s. 37 or capital loss u/s. 45 - business of manufacturing and real estate - loan given to subsidiary company to acquire shareholding - loan not connected with the business of the assessee company - AO rejected the claim - In earlier years interest in respect of loans had been disallowed on the ground that the loans were not given in business interest - alternative claim of the assessee was also rejected on the ground that loan could not be said to be capital asset and therefore, loss suffered on settlement of loan could not be said to be capital loss u/s. 45 - CIT(A) upheld the order passed by AO. HELD THAT - The loan given to DCM International Ltd. was not connected with the business of the assessee company. Thus the amount of loan initially given was not in line with the business activities of the assessee. When the amount advanced is not in line with the business, the same cannot be treated as has been advanced during the course of normal business activities of the assessee. Moreover a single transaction of loan cannot be termed as business activity and that too after lapse of several years when loss of capital has occurred. It is a settled law as held by Hon'ble Supreme Court in the case of CIT vs. Nainital Bank Ltd. 1964 (9) TMI 11 - SUPREME COURT that every loss is not so deductible unless it is incurred in carrying out the operation of the business and is incidental to the operation. Therefore, we find that the assessee had advanced loan for acquisition of shares in joint venture company DCM Toyota Ltd., which was renamed as DCM Daewoo Motors Ltd. Thus the amount advanced was in respect of fixed capital. Therefore, the assessee's claim cannot be allowed as a business loss u/s. 28 r/w s. 37. As contended that the Tribunal has allowed the claim of the assessee in AY 2000-01 by dismissing the Revenue's appeal that interest paid on borrowed funds diverted to sister concerns as a measure of commercial expediency could not be disallowed in view of decision of Hon'ble Supreme Court in the case of S.A. Builders Ltd. vs. CIT(A) Anr. 2006 (12) TMI 82 - SUPREME COURT . Hence, the Tribunal has accepted the contention of the assessee in principle that the said loan was given for the purposes of business and, therefore, the loss incurred is allowable as deduction u/s. 28/37 as the same was incurred during carrying on of the business of the assessee. We are unable to accept this proposition. It is a settled law as held by Hon'ble Supreme Court in the case of CIT vs. Sun Engineering Works (P) Ltd. 1992 (9) TMI 1 - SUPREME COURT that it is neither desirable nor permissible to pick out a 'Word or a sentence from the judgement of the Supreme Court divorced from the context of the question under consideration and treated to be the complete law declared by the Court. The judgement must be read as a whole and the observations from the judgement have to be considered in the light of questions which were before the Court. Therefore, in view of decision of Hon'ble Supreme Court in the case of Sun Engineering Works (P) Ltd. the assessee cannot be treated to be engaged in the business of money-lending and the loss of capital will be allowable as business loss. Therefore, the claim of the assessee does not survive. The term 'capital asset' has been defined u/s. 2(14), which means property of any kind connected with his business or profession, but does not include (i) any stock-in-trade, consumable stores or raw materials held for the purpose of the business; (ii) personal effects; (iii) agricultural lands. The definition of transfer in cl. (47) of s. 2 includes extinguishment but that extinguishment refers not to the extinguishment of the asset itself but to the extinguishment of the holder's right to the assets. This position of law has been finally settled by the Supreme Court in its decision in Vania Silk Mills (P) Ltd. vs. CIT 1991 (8) TMI 2 - SUPREME COURT . In the view of the Supreme Court, where the assets are destroyed, there is no question of their transfer to others, there is a capital loss but it is not on account of any transfer, but it is on account of disappearance of the asset itself. The said principle applies in case before us. When an assessee finds his valuable assets like loan valueless merely for the inability of the debtor company to pay a part of such loan, the assessee's asset in the form of loan disappears. This is a position which the assessee admits not only by declaration but also by conduct. The assessee has written off the loan as loss to it for good. That being the case, here also we cannot say that there is any transfer involved. It is purely a case of disappearance of the loan itself. It is not that the assessee has transferred its right to the assets in favour of a third party whereby the right has extinguished. The asset itself is extinguished. Thus in our considered opinion the loss suffered by the assessee cannot be treated as capital loss u/s. 45. Thus, claim of the assessee is not allowable either as business loss u/s. 28 r/w provisions of s. 37 nor as capital loss u/s. 45. Therefore, we do not find any infirmity in the order of CIT(A) confirming the stand of the AO on both the counts. The appeal filed by the assessee is dismissed in terms of above discussions.
Issues Involved:
1. Disallowance of Rs. 98,55,254 as a business loss. 2. Alternative claim of Rs. 98,55,254 as a capital loss under Section 45 of the IT Act. Issue-wise Detailed Analysis: 1. Disallowance of Rs. 98,55,254 as a Business Loss: The primary issue for consideration relates to the disallowance made by the Assessing Officer (AO) of Rs. 98,55,254, which was claimed as a business loss by the assessee. The facts of the case reveal that the assessee provided a loan to its wholly-owned subsidiary, DCM International Ltd., to acquire shares of DCM Toyota Ltd. from Toyota Corporation, Japan. The loan was given to protect the investment in the joint venture, which later involved Daewoo Motors of Korea. Due to financial difficulties, the shares were pledged, and a significant portion was disposed of by financial institutions against the loan. The remaining shares were acquired by the assessee, and the balance amount of Rs. 98,55,254 was written off as bad debts. During the assessment proceedings, the assessee contended that the amount written off should be allowed as a deduction since it was debited against a provision for bad debts made in earlier years. The AO rejected this claim, stating that the loss was not allowable as business expenditure. The learned CIT(A) upheld the AO's decision, noting that the loan was not in line with the assessee's normal business activities of manufacturing and real estate. Upon appeal, the assessee argued that the loan was given on the principle of commercial expediency and should be considered a business loss under Section 28 read with Section 37 of the IT Act. However, the Tribunal observed that the loan was not connected with the assessee's business activities and was not in the ordinary course of business. Citing the Supreme Court's decision in CIT vs. Nainital Bank Ltd., the Tribunal concluded that the loss was not incidental to the business operations and thus could not be treated as a business loss. 2. Alternative Claim of Rs. 98,55,254 as a Capital Loss under Section 45 of the IT Act: The assessee alternatively claimed that the loss should be treated as a capital loss under Section 45 of the IT Act, arguing that the extinguishment of the right to recover the loan amounted to a transfer. The AO rejected this claim, stating that the loan could not be considered a capital asset. The Tribunal examined the definition of "capital asset" under Section 2(14) and "transfer" under Section 2(47) of the IT Act. It referred to the Supreme Court's decision in Vania Silk Mills (P) Ltd. vs. CIT, which held that extinguishment refers to the holder's right to the asset, not the asset itself. The Tribunal concluded that the loss was due to the disappearance of the loan asset and not a transfer, thus it could not be treated as a capital loss. Conclusion: The Tribunal dismissed the appeal, affirming that the claim of Rs. 98,55,254 was not allowable either as a business loss under Section 28 read with Section 37 or as a capital loss under Section 45 of the IT Act. The decision of the learned CIT(A) was upheld, confirming the AO's stand on both counts.
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