2016 (8) TMI 562 - HC - Income Tax

Loss on sale of actionable claim - whether was a business loss allowable as a deduction in the accounting period ending 31.12.1977? - Held that - The submission of Assessee that the amount of ₹ 103 lakhs were advanced to M/s. Varun Shipping Company Ltd., was onaccount of business expediency so as to ensure that the State Bank of India does not adopt proceedings to enforce the guarantee given by the Respondent-Assessee for the loan granted to M/s. Varun Shipping Company Ltd. is a possible course of action adopted by a business. Further, we find that the investment of the Respondent-Assessee in M/s. Varun Shipping Company Ltd., is reflected in its contribution to the share capital of M/s. Varun Shipping Company Ltd.,. This contribution can be considered to be an investment as any increase in profitability of M/s. Varun Shipping Company Ltd., would result in dividends and likely appreciation of the share price resulting in the investor earning more than the investment made. The advance of ₹ 103 lakhs is not with the above objective/intention. In any case, it is very clear from the Assessment Order that the interest to the extent to which the Respondent-Assessee had waived, on the advance of ₹ 103 lakhs to M/s. Varun Shipping Company Ltd., was treated as business income and not as income from other sources. In the above view, the amount of ₹ 103 lakhs advanced to M/s. Varun Shipping Company Ltd., cannot be considered to be an investment in the present facts but appropriately a loan in the course of carrying on of business. Consequently, any loss on account of nonrecovery of ₹ 103 lakhs or any part thereof, would necessarily be a business loss in computing the profits and gains from business. Therefore, the first subpart of the question of law as framed is to be answered in the affirmative i.e. the loss on account of reduced recovery of the loan of ₹ 103 lakhs advanced to M/s. Varun Shipping Company Ltd., is to be considered as a business loss and not as a loss on investment.

Issues Involved:
1. Whether the loss on sale of actionable claim was a business loss allowable as a deduction to compute its profits and gains from business.
2. Whether the loss on sale of actionable claim is allowable as deduction in the subject Assessment Year or in the following Assessment Year.

Detailed Analysis:

Issue 1: Whether the loss on sale of actionable claim was a business loss allowable as a deduction to compute its profits and gains from business.

The primary contention by the Revenue was that the Respondent-Assessee is not in the business of providing loans, and thus, the amount of ?103 lakhs advanced to M/s. Varun Shipping Company Ltd. should be treated as an investment, not a business transaction. The Revenue also argued that advancing a loan to a company making a loss is not a prudent business decision.

The Respondent-Assessee countered that the amount was advanced for business expediency to prevent the State Bank of India from enforcing a guarantee given by the Respondent-Assessee for a loan to M/s. Varun Shipping Company Ltd. Additionally, the Assessing Officer had treated the interest on the amount advanced as business income, indicating that the advance was part of the Respondent-Assessee's business activity.

The court held that merely because the Respondent-Assessee does not normally grant loans, it does not imply that the advance to M/s. Varun Shipping Company Ltd. was an investment. The court referenced legal precedents to assert that even a single transaction could be classified as a business transaction. The court also rejected the Revenue's argument about prudent business decisions, citing the Supreme Court's observation that the manner of conducting business is for the Assessee to decide.

The court concluded that the advance of ?103 lakhs was a business transaction aimed at preventing the State Bank of India from enforcing a guarantee, thus any loss from non-recovery should be treated as a business loss. Consequently, the first subpart of the question was answered in the affirmative, recognizing the loss as a business loss.

Issue 2: Whether the loss on sale of actionable claim is allowable as deduction in the subject Assessment Year or in the following Assessment Year.

The Revenue contended that the loss could only be recognized in the following Assessment Year (1979-80) because the actionable claim was transferred by deed on 30th March 1978. According to the Revenue, the loss could only be recognized upon the execution of the deed of sale/assignment of the actionable claim.

The Respondent-Assessee argued that an arrangement was made on 27th October 1977, during the subject Assessment Year, where a director agreed to take over the actionable claim for ?45 lakhs, resulting in a loss of ?58 lakhs. This loss was claimed in the Profit & Loss Account and Balance Sheet for the year ending 31st December 1977, and the Tribunal allowed this based on the mercantile system of accounting.

The court found merit in the Respondent-Assessee's argument that the question of the loss on sale of the actionable claim was academic in the present facts and need not be answered. The Tribunal's decision was based on the arrangement dated 27th October 1977, which allowed the loss to be quantified and claimed in the subject Assessment Year. The court also referenced a precedent where it was observed that disputes over the year of deduction should not be raised if the deduction is permissible and does not affect the taxability or the tax amount.

The court concluded that the question of law regarding the year of deduction need not be answered as it was academic in the context of the Tribunal's order, which allowed the loss based on the arrangement dated 27th October 1977.

Final Judgment:
The court answered the first sub-question in the affirmative, recognizing the loss as a business loss allowable for the accounting year ending 31st December 1977 (Assessment Year 1978-79). The second sub-question was not answered as it was deemed academic in nature. The Reference was disposed of with no order as to costs.

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