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TMI Blog1995 (1) TMI 127X X X X Extracts X X X X X X X X Extracts X X X X ..... ed Devika Tower. The Assessing Officer noted from the partners' account that there was withdrawal of capital and at the same time the firm had paid interest on loan to outsiders. He disallowed an amount of Rs. 46,133.80 in this behalf and added the same in the income of the assessee. He further noted that the assessee had claimed Rs. 31.05 lakhs as bad debts. On enquiry from the Assessing Officer, the assessee submitted that it had made an application on 12-3-1982 for acquiring commercial space in a proposed multi-storey building Ambika Tower House, Asaf Ali Road, New Delhi. The promoter of the project M/s. Pragati Construction Co. (P.) Ltd. happened to be a sister concern of the assessee-firm and the said company was to acquire the proposed plot. The assessee-firm had paid Rs. 44.50 lakhs to M/s. Pragati Construction Co. (P.) Ltd. who had deposited Rs. 48 lakhs at the time of auction with the DDA but later on the DDA vide its letter dated 4-4-1985 forfeited the earnest money of Rs. 48 lakhs. Thereupon M/s. Pragati Construction Co (P.) Ltd. vide its letter No. 107 dated 14-12-1988 informed the assessee-firm that the company was not in a position to pay back the amount and that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ie., the debt should have been brought in as a trading receipt to swell the profit or reduce the loss of any year. He further observed that the scope of the claim was restricted to the trade debts only and not to loans and advances given in the ordinary course of business and that in the present case the said amount was merely an advance and that too to a sister concern where directors and partners were common. In the circumstances the case of the assessee was not covered by the provisions of section 36(1)(vii) of the I.T. Act. He accordingly disallowed the said amount of Rs. 31.05 lakhs and added back the same to the total income of the assessee. 3. On appeal before the CIT(A), the assessee made a request for modifying the grounds of appeal relating to the addition of Rs. 31.05 lakhs on account of disallowance as bad debts. The modified ground of appeal was forwarded by the CIT(A) to the Assessing Officer for his comments. The Assessing Officer stated that the money which was deposited by the assessee-firm with M/s. Pragati Construction Co. (P.) Ltd., sister concern, was in the nature of advance and could not be treated as bad debt. He further stated that various conditions lai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and that the assessee had been showing profit as well in the past. He further submitted that as the said company had no resources to return back the amount of Rs. 31,05,000 to the assessee, the assessee did not want to waste good money for the recovery of bad money and that no adverse inference should be drawn from the fact that no legal action had been taken by the assessee against the said company. The counsel further raised a plea that the amount of Rs. 31,05,000 had been claimed as business loss without prejudice to the claim of bad debt. He elaborated the point that bad debt was there when some sales were effected on which gross profit etc., had been declared. However, if the amount involved in the transaction was not received from sundry debtors in the subsequent years, and it was found that the same was irrecoverable, after satisfying certain conditions, it is claimable as bad debt. The counsel further mentioned that in the assessee's case, during the normal course of business, space had been booked with a particular party depositing the specified amount. Since the said party had bid in the auction for the plot in which the commercial space was to be built and had deposited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee did not appear to have acted with business prudence as it did not appear to have taken into consideration security and safety of the amount advanced for booking of space with the said company. He further observed that the assessee had applied for booking of space with the said company on 12-3-1982 and the amount of advance with the said company had been given near about the same date. The earnest money of Rs. 48 lakhs deposited by the said company had been forfeited on 4-4-1985. In this background, the CIT(A) observed that " if bad debt or loss was to be claimed at all, assessee could have done so in the assessment year 1986-87 relevant for accounting year 1985-86 wherein the date of forfeiture of amount fall. However, the assessee has chosen to claim loss/bad debt in the accounting year relevant for the assessment year under appeal on the basis of the so-called letter dated 14-12-1988 from M/s. Pragati Construction Co. (P.) Ltd., wherein it is stated that the company did not have tangible asset which could be engaged in the market for payment of the amount involved." The CIT(A) also referred to the letter dated 24-3-1992 written by the Dy. Director, Slum Wing, DDA and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the learned counsel invited our attention to the agreement dated 2-6-1982 which is placed at pages 2 to 6 of the paper book. He submitted that the assessee had made an application dated 12-3-1982 for the allotment of commercial space in the proposed building to be constructed by M/s. Pragati Construction Co. (P.) Ltd. The approximate covered area, for which the application had been made, was 3,800 sq. ft. on ground floor at a rate of Rs. 2,500 per sq. ft. and the approximate cost was Rs. 95 lakhs. He further referred to the first paragraph at page 5 of the agreement, wherein the assessee-firm requested the company to adjust the amount of Rs. 36,55,000 paid to the company as advance for booking of the space as earnest money for the booking of the said space. He further invited our attention to the letter dated 22-12-1987 written by the Dy. Director, DDA, placed at page 7 of the paper book, wherein the company was informed that their request for refund of earnest money cannot be acceded to as the bid of the plot had been cancelled and the amount of earnest money was forfeited by the Chairman, DDA, Lt. Governor, Delhi in accordance with the terms and conditions of the auction. He furt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ey given to the company was purely revenue in nature." With reference to the observations of the CIT(A) made in para 11of his order, the learned counsel submitted that there was an agreement dated 2-6-1982, that the transactions were genuine and that similar transactions were there in the earlier years. He also mentioned that M/s. Pragati Construction Co. (P.) Ltd. was a sister concern and rather it proves that the assessee had reason for giving the money to the said company. The learned counsel relied on the following case laws :-- 1. Ram Chandar Shivnarayan v. CIT [1978] 111 ITR 263 (SC) 2. CIT v. Mysore Sugar Co.Ltd [1962] 46 ITR 649 (SC) 3. Standard Batteries Ltd v. ITO [1985] 11 ITD 309 (Bom.) 4. CIT v. Inden Biselers [1989] 47 Taxman 225 (Mad.) 5. P. Satyanarayana v. CIT [1979] 116 ITR 803 (AP) 6. CIT v. Rohtas Industries Ltd [1979] 120 ITR 110 (Cal.) 7. CIT v. Nainital Bank Ltd [1965] 55 ITR 707 (SC) 8. Indore Malwa United Mills Ltd v. State of Madhya Pradesh [1965] 55 ITR 736 (SC) 9. Devi Film (P.) Ltd v. CIT [1970] 75 ITR 301 (Mad.) 10. ITO v. Gokal Chand Jagan Nath Nahar, ITO [1982] 1 ITD 469 (Delhi) 475 11. CIT v. Abdullabhai Abdulkadar [1961] 41 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (vi) provides that when the bid is accepted by DDA, the intending purchaser shall within three months from the date of acceptance of the bid or within 60 days from the date of informing the intending purchaser of the acceptance of the bid by registered letter, whichever is earlier, pay to the Director (Slum), DDA, the balance 75% amount of the bid in cash or by Bank Draft. Clause (vii) stipulates that physical possession of the plot shall be handed over only after the full amount of the bid is paid by the intending purchaser. The learned D.R. emphasised that the assessee-firm was aware of the fact that the bid could be rejected by the DDA under certain circumstances. He further referred to para 5 of the said terms and conditions, which requires the lessee to obtain prior permission of the DDA (Slum Wing) in writing, before selling or transferring the floor space constructed on the plot. It further stipulates that the said written permission will be granted on payment of Rs. 100 for each case of sale/transfer provided such a transaction does not violate the said terms and conditions. It further provides that for sale/transfer subsequent to the first sale of the floor space unit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t have exceeded Rs. 23.25 lakhs. He submitted that in the present case the assessee had advanced initially an amount of Rs. 44.5 lakhs on 12-3-1982 and Rs. 3.5 lakhs on 16-3-1982. He submitted that further payment to the builder company could not be before 12-5-1982, which is the date of receipt of control drawings from DDA. 5.1 In view of the foregoing facts, the learned D.R. submitted that the assessee-firm was financing the sister concern's business or fostering the business of the sister concern and that the agreement dated 2-6-1982 had been entered into by the assessee-firm with the sister concern to cover the whole transaction. He further submitted that the payment of the amount of Rs. 31.05 lakhs was, therefore, merely an advance to M/s. Pragati Construction Co. (P.) Ltd. and giving of the said funds by the assessee-firm had nothing to do with the business of the assessee. In this connection, the learned Departmental Representative relied on the following case laws : 1. A. V. Thomas & Co. Ltd 's case 2. Bengal Enamel Works Ltd v. CIT [1970] 77 ITR 119 (SC), 3. Indian Aluminium Co. Ltd v. CIT[1971] 79 ITR 514 (SC), 4. CIT v. Panipat Woollen & General Mills Co. Ltd [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its dues. The assessee accordingly waived its rights in respect of Rs. 2,87,422 and claimed the said amount as a deduction under sections 10(2)(xi) and 10(2)(xv) of the I.T. Act, 1922. The question was whether the said amount which was given up represented a loss of capital or was a revenue expenditure. It was held that there was no element of a capital investment in making the advance and the loss incurred by the assessee was, therefore, a loss on the revenue side and was deductible. 6.1-3 In the case of Nainital Bank Ltd, the respondent, a public company which carried on the business of banking, had a branch situated at Ramnagar. In the usual course of its business large amounts were kept in various safes in the premises of that branch. There was a dacoity on 11-6-1951 and the dacoits carried away cash amounting to Rs. 1,06,000. It was held that the loss incurred by dacoity was incidental to the carrying on of the business of banking and was deductible as a trading loss in computing the income of the respondent from banking business. It was further observed that " whether loss is incidental to the operation of a business is a question to be decided on the facts of each case, h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rnment securities. The assessee had sold some Government securities and bonds. It borrowed a sum of Rs. 50,000 in cash for the purposes of purchasing Government securities and the amount was handed over to the cashier and when the cashier was busy in taking out certain books, a stranger committed theft of Rs. 30,000 out of the said amount. The amount could not be recovered in spite of lodging a complaint with the police. The Apex Court held, reversing the decision of the High Court, that the loss of Rs. 30,000 was directly connected with the business operation and was incidental to the carrying on of the business of purchase of Government securities to earn profit, and in such a situation it was part of the trading loss and deductible as such in arriving at the true profits of the assessee. 6.1-7 In the case of P. Satyanarayana, the assessee, a film distributor, advanced certain amounts to the producer of a film for the purpose of production of the motion picture under an agreement which provided for realisation of the amount advanced by him after exhibition of films. The said amount could not be realised in full out of the collections through exhibition of such films, and by an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee was found to have advanced a large amount even before the incorporation of the company, it could not be said that the said advances were for the purpose of the assessee's business. In fact, the impugned advances were made not only before the company's incorporation, but thereafter too the advances were made for setting up of the company's factory. Thus, the advances were made by the assessee to the company for creating a source from where goods could be purchased. The creating as source for making purchases would be an enduring benefit and that'the loss would be of a capital nature." It further observed that the loss could not be also have pertained to the assessment year 1971-72 since it had accrued when the accounts were finally settled on 31-3-1968. No effective action, legal or otherwise, was initiated by the assessee-firm for recovering dues from the company apparently for the reason that the shareholders and the directors of the company were the same persons as the partners. 6.1 - 10 In the case of Standard Batteries Ltd. the assessee entered into a collaboration agreement with another company, under which the assessee was to receive 50% of production of the other co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -company approved of the action taken by the Director and passed a resolution that the amount of Rs. 6 lakhs should be shown in its accounts as an advance for the purchase of shares in the textile mill and the sum of Rs. 5,072 as sundry advances due from the promoters of the textile mill. The project of promoting the textile mill failed. The private company paid back to the assessee a sum of Rs. 2,00,000. The assessee wrote off the balance on December 31,1951, which was the date on which its accounting year ended and claimed the balance as a bad debt or alternatively as a business expenditure for the assessment year 1952-53. There was evidence to show that the assessee expected to obtain the selling agency of the goods to be produced by the textile mill. It was held that the assessee-company, in making the large payments, intended to acquire a capital asset for itself and that in any event the amounts were spent in 1948 and not in the year of account ending December 31, 1951. Therefore, they could not be allowed as business expenditure under section 10(2)(xv) of the I.T. Act, 1922. It was further held that the assessee-company was neither a banker nor a money-lender, the advances p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... liability. It was held that the amount which the assessee was bound to deduct from the payment made to the Canada company under section 18(3B) and which it failed to recover from that company could not be regarded as a bad debt under section 10(2)(xi) of the Act and that the payment made under a statutory obligation because the assessee was in default could not constitute expenditure laid out for the purpose of the assessee's business within the meaning of section 10(2)(xv). 6.2-4 In the case of Panipat Woollen & General Mills Co. Ltd the respondent-company entered into an agreement with M/s. Saligram Premnath on 20-10-1955 by which the latter were appointed sole selling agents. The agents were to invest full amount for the working of the worsted plant of the respondent-company, from the purchase of wool tops to the completion of the sale of yarn including wages, power, repairs, etc. Programme for the manufacture of goods was to be made by the respondent-company in consultation with and with the consent of the agents. The accounts of the worsted plant were to be maintained separately. The agents were entitled to interest of 6% on all advances made and in addition a commission of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transaction was a collusive device to reduce the incidence of taxation. The Tribunal affirmed the disallowance holding that the payment of commission was not made for reasons of commercial expediency or legitimate business interest. On a reference, the High Court confirmed the disallowance. 6.2-6 In the case of Travancore Tea Estates Co. Ltd. the assessee was a non-resident company engaged in the business of growing, manufacturing and selling tea. A sum of Rs. 40,81,140 was due to the assessee on account of tea supplied to another company. The Indian undertaking of the assessee was transferred to R with effect from September 1, 1976. A day before the transfer of the undertaking, i.e., on August 31, 1976, the assessee wrote off the amount of Rs. 40,81,140 due to the other company for the sale of tea to them and the assessee claimed the said amount as a deduction on account of bad debt. The amount, admittedly, represented the price of tea supplied up to December 31, 1974. On October 31, 1975, the assessee moved the civil court under the Arbitration Act according to the provisions contained in the agreement. It was during the pendency of those proceedings that the assessee transfer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eft thereafter amounting to Rs. 1,38,146 was written off from the loan account. Both these amounts were claimed as deductions by the assessee in computing its taxable income for the relevant assessment year. The ITO did not accept the reversal of the entries by the assessee. He, therefore, allowed as deduction only the amount written off in the goods account and disallowed the amount which was written off in the loan account. The AAC, however, allowed full deduction of the amount to the extent of debts which were due from M, on account of goods supplied to it, as a bad debt. He, however, did not allow deduction of the balance of Rs. 1,38,146 which was written off from the loan account as, according to him, it was a capital loss which was not deductible in computing income under section 28 of the I.T. Act, 1961. The decision of the AAC was approved by the Tribunal. On a reference it was held that M's financial condition was bad not only in the year of consideration but as far back as in 1962. The assessee was simply a supplier of goods to it and M was one of its buyers. M was not the sole buyer of the goods sold by the assessee. When the financial condition of M, the buyer company, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot be allowed as a deduction under the head " Other sources " since no income from the shares had accrued although the assessee was having income from director's fee, etc., under the head " Other sources". The AAC, however, held that the interest paid by the assessee could be added to the cost of the said shares and the short-term capital loss was to be computed accordingly. The Tribunal upheld the finding of the AAC. The Tribunal further found that the market price of the shares of PPM was Rs. 25 only as recorded in the order of the AAC and that no material had been adduced on behalf of the Department to show that the market rate was higher. on a reference to the High Court it was held that pre-incorporation contracts, as a general rule, cannot bind a company. Even assuming that the contract was valid, the facts and surrounding circumstances deserved a closer look. The assessee had acquired the controlling interest in PPM along with his wife, nephew and other family members. Out of the total number of shares of 1,00,360, the Kerala Government had been holding 12,000 shares and the rest were held by the assessee along with his relations and family members. Two companies were formed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... too close to the year of closing. The certificate of registration of LNE had, however, been issued on June 6, 1969. The assessee was holding the shares as his investment portfolio, more particularly for controlling interest, and the loss from the transfer of such shares could not but be a capital loss. This loss had formed a cushion against the future gain, capable of being carried forward and set off against the future capital gain. Though a paper loss, it had got a far-reaching effect on the tax liability in future years of the transferor. The facts obtaining in the present circumstances were not rightly appraised and the proper inferences drawn. The transaction of sale of shares were not genuine. The loss of Rs. 3,00,311 could not be allowed. It was further held that it is well-settled that an allowance for deduction can be upheld on a ground other than that on which it was allowed by the Tribunal. The sum on account of interest was allowable as deduction under the head "Other sources". 6.3 A close study of the case laws relied upon by the learned counsel as also by the learned Departmental Representative would show that the question as to whether the loss is incidental to th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the agreement. The case law relied upon by the learned counsel for the assessee is therefore, clearly distinguishable when applied to the aforesaid facts of the present case, and the same is of no help to the assessee, rather the cases mentioned in paras 6.1-1 and 6.1-9 go against the assessee. We have also carefully considered the case law relied upon by the learned Departmental Representative and we find that the ratio laid down in the cases of Indequip Ltd. and L.N. Dalmia supports the case of the Department. In the background of these cases, we agree with the analysis of the facts of the case made by CIT(A) in paragraphs 15 and 16 of his order that the three Directors of M/s. Pragati Construction Co. (P.) Ltd. to whom the advances in question were made are associated with the assessee-firm ; that normally the assessee-firm would not have advanced such a considerable amount of money to any other party which had its own capital of only Rs. 24,000 and that the assessee-firm do not appear to have acted with business prudence as it did not take into consideration security and safety of the amount advanced for booking of space with the said company. In view of the foregoing facts ..... X X X X Extracts X X X X X X X X Extracts X X X X
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