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TMI Blog2007 (2) TMI 276X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee s claim as a business loss , or alternatively, as a revenue expenditure u/s 37(1), claimed in AY 2001-02 and in AY 2002-03. It represents payments made by the assessee company and its associates to Indocan as ICDs because Indocan was in financial difficulties. The operations of the business of the assessee company are mentioned. Therefore, we have to hold that the payments of ICDs to Indocan had neither a direct and proximate nexus with, nor was it incidental to, the carrying on of the operations of the business of the assessee company as mentioned. Admittedly, it is not the business of the assessee company to make deposits as ICDs. We, therefore, hold that the claim can neither be allowed as a business loss nor as a revenue expenditure u/s 37(1) of the Act. The nexus must be direct and proximate and it should be with the carrying on of the operations of the business . In the present case such a direct and proximate nexus between the impugned payments aggregating sum and the carrying on the operations of the business of the assessee company is totally absent as can be seen from the discussions. The ground is accordingly rejected - In the result, the appeal is rejected. X X X X Extracts X X X X X X X X Extracts X X X X ..... /5th allowed by the AO under s. 35D be withdrawn. In other words, the CIT(A) enhanced the assessment to the extent stated above. 6. Shri. S.K. Lal, the learned Authorised Representative, reiterated the arguments put forward on behalf of the assessee before the AO and the CIT(A). He placed reliance on the decision of Tribunal, Mumbai, in the case of Standard Industries Ltd. vs. Jt. CIT, SR-20, Mumbai in ITA No. 5636/Mumbai/1999 for asst. yr. 1995-96, dt. 27th Sept., 2002. 7. Shri. Pradeep Sharma, the learned CIT(A), relied on the orders of the authorities below. He vehemently argued saying that the order of the CIT(A) needed to be upheld. 8. We have considered the rival submissions in the light of material on record and precedents cited. In our opinion, this issue is covered in favour of the assessee by the decision of Tribunal, Mumbai, in the case of Standard Industries Ltd. It is seen that in the case of Standard Industries Ltd., the assessee company had incurred expenditure of Rs. 36,90,306 on a proposed GDR issue. Subsequently, the company dropped the proposed GDR issue, wrote off Rs. 36,90,306 and claimed it as revenue expenditure. The Tribunal allowed the assessee's cla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... companies, in that case it would be liable to pay the principal amount along with interest. 9.2 The assessee company appointed three directors on the board of Indocan. Subsequently, it was noticed by these directors, who were appointees of the assessee company, that Indocan had accumulated substantial losses and therefore, steps were taken to recover the inter-corporate deposits from Indocan and cases were filed in the Court. In the meeting held on 26th April, 2001, the board of directors of the assessee company decided to write off Rs. 76.68 lakhs representing the value of the shares of Indocan and Rs. 145.36 lakhs representing the irrecoverable inter-corporate deposits. 9.3 In the P&L a/c for the accounting years ending 31st March, 2001 and 31st March, 2002, the assessee wrote off Rs. 2,19,35,000 (2,22,04,000-2,69,000) and Rs. 75,00,000, respectively. In the assessments orders for asst. yrs. 2001-02 and 2002-03 dt. 30th March, 2004 and 31st Jan., 2005, respectively, the AO disallowed the above claims and his action was confirmed by the CIT(A). The orders of the CIT(A), on this point, in both the years, have been challenged by the assessee in these appeals. 10. Shri S.K. Lal, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. Bombay Dyeing & Manufacturing Co. Ltd. (1996) 132 CTR (SC) 217 : (1996) 219 ITR 521 (SC); (v) Standard Industries Ltd vs. JCIT for asst. yr. 1995-96 in ITA No. 5636/Mumbai/1999 dt. 27th Sept., 2002; (vi) CIT vs. Woodcraft Products Ltd. (1993) 111 CTR (Gal) 149 : (1996) 217 ITR 862 (Cal); (vii) CIT vs. Graphite India Ltd. (1997) 137 CTR (Cal) 123 : (1996) 221 ITR 420 (Cal). 11. Shri Shri Pradeep Sharma, the learned CIT(A), relied on the orders of the authorities below. He vehemently argued saying that the order of the CIT(A) needed to be upheld. He placed reliance on the decisions in the following cases: (i) Distillers' Trading Corpn. Ltd. vs. CIT (2001) 252 ITR 795 (Del); (ii) CIT vs. Abdullabhai Abdulkadar (1961) 41 ITR 545 (SC); (iii) Binodiram Balchand & Co. vs. CIT (2002) 173 CTR (MP) 12 : (2001) 251 ITR 819 (MP); (iv) B.D. Bharucha vs. CIT (1967) 65 ITR 403 (SC); (v) Travancore Tea Estates Co. Ltd. vs. CIT (1992) 102 CTR (Ker) 273 : (1992) 197 ITR 528 (Ker); (vi) CIT vs. Sembi Traders (1997) 137 CTR (Mad) 601 : (1996) 221 ITR 410 (Mad); (vii) Indequip Ltd. vs. CIT (1994) 116 CTR (Bom) 261 : (1993) 202 ITR 417 (Bom); (viii) Narang Industries Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ses in the running of the business cannot be said to be of capital. The questions to consider in this connection are for what was the money laid out? Was it to acquire an asset of an enduring nature for the benefit of the business, or was it an outgoing in the doing of the business? If money be lost in the first circumstance, it is a loss of capital, but if lost in the second circumstance, it is a revenue loss. In the first, it bears the character of an investment, but in the second, to use a commonly understood phrase, it bears the character of current expenses." 17. In the case of CIT vs. Nainital Bank Ltd. (1965) 55 ITR 707 (SC), the Supreme Court observed that under s. 10(1) of the 1922 Act, the trading loss of a business was deductible for computing the profit earned by the business. But, every loss was not so deductible unless it was incurred in carrying out the operations of the business and was incidental to the operation. Whether a loss is incidental to the operations of a business was a question of fact to be decided on the facts of each case, having regard to the nature of the operations carried on, and the nature of the risk involved in carrying them out. The degr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd deductible as such in arriving at the true profits of the appellant: it was immaterial whether Government securities were purchased with the remaining sum of Rs. 20,000 or not. The Court observed that if there was a direct and proximate nexus between the business operation and the loss or if it was incidental to it, then the loss was deductible. 21. It is to be remembered, the Court noted, that the direct and proximate connection and nexus must be between the business operation and the loss. It goes without saying that a businessman has to keep money either when he gets it as business expenses or for purchasing stock-in-trade and if he loses such money in the ordinary course of business, the loss is a deductible trading loss. It is immaterial whether the money is a part of the stock-in-trade, such as, of a banking company or a money-lender, or is directly connected with the other business operations. The risk is inherent in the carrying on of the business and is either directly connected with it or incidental to it. 22. In the written submission filed by the learned Authorised Representative during the hearing before us, the first case relied upon is of the Bombay High Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee company started advancing monies to it from time to time. The debit balance in the loan account swelled upto Rs. 18,38,837 at the end of the previous year relevant to asst. yr. 1970-71. In view of the unsatisfactory financial condition of the textile company, the assessee wrote off the entire amount as bad debt. The Tribunal, while disallowing the assessee's claim held that the loan written off by the assessee was a capital loss and that it had nothing to do with the business of the assessee. The Bombay High Court, following the principles laid down by the Supreme Court in the case of Badridas Daga, held that the loan was not incidental to the carrying on of the business of supply of goods by the assessee and confirmed the order of the Tribunal. 25. The principles laid down by the Supreme Courts in the abovementioned cases can be summarized as under: (i) A loss is deductible as a 'business loss', only if the loss is incurred in the carrying out the operations of the business; (ii) A loss of money is a revenue loss only if it is lost in the doing of the business of the assessee; (iii) A loss is deductible as a 'business loss' only if there is a dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dors) and the assessee company of the other part (the purchasers) agreeing inter alia as under: - that the vendors shall sell and the purchasers shall purchase 1,03,500 equity shares. - that the consideration for the sale of the said shares shall be Rs. 270 per share aggregating to Rs. 2,79,45,000. - that upon acquisition of 60 per cent of the equity shares the purchaser-company shall be renamed as 'Ador Indocan Limited'. 30. The details of payments made by the assessee company and its associates to Indocan are as under: Payments made by Cheque date Amount (Rs.) Shares ICDs Ador Samia Limited 03.09.1997 - 40,00,000 03.09.1997 - 10,00,000 12.09.1997 5,13,000 - 12.09.1997 2,83,500 - 12.09.1997 42,79,500 - Ador Thermal Engg. Limited 03.09.1997 - 50,00,000 10.09.1997 15,12,000 - 10.09.1997 10,80,000 - Ador Finance Limited 05.09.1997 - 9,00,000 05.09.1997 - 6,00,000 05.09.1997 - 25,00,000 Advani Oerlikon Limited 04.09.1997 - 25,00,000 05.09.1997 - 25,00,000 05.09.1997 - 25,00,000 Total 2,15,00,000 Interest on ICDs of Ador Finance Limited - 5,36,548 Total 76,68,000 2,20,36,548 31. The details of the total cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... orate deposits along with interest to the assessee company. It is pertinent to note here that the award was given on 18th Oct., 2001, whereas the assessee wrote off the above amounts as irrecoverable during the year ending 31st March, 2001 itself. 35. The first component of the assessee's claim as a 'business loss' or alternatively, as a revenue expenditure under s. 37(1), is for Rs. 76,68,000, as mentioned in paras 30 and 31 above, which represents the payments made to the shareholders for acquiring the shares of Indocan. We fail to see the rationale behind this claim. Manifestly, it cannot be said that this payment had any direct and proximate nexus with, or that it was incidental to, the carrying on of the operations of the business of the assessee company as mentioned in para 26 above. We fail to comprehend as to how the payments made to the promoters for buying the shares of Indocan could be claimed as a revenue expenditure under s. 37(1). We, therefore, hold that the claim can neither be allowed as a 'business loss' nor as a revenue expenditure under s. 37(1) of the Act. 36. The other component of the assessee's claim as a 'business loss', or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounting to Rs. 80,5000 are eligible for deduction while computing the income in case of appellant under the provisions of IT Act. The appellant be granted just and proper relief in this respect." 40. During assessment proceeding, it was noticed by the AO that the assessee had debited in the P&L a/c Rs. 80,500 as EDP software expenses. It was explained on behalf of the assessee that this expenditure was incurred for a software package developed by M/s Avam Soft for financial accounting, material accounting as well as payroll. It was contended by the learned Authorised Representative that the expenditure was incurred in the ordinary course of the assessee's business and was allowable as revenue expenditure. The AO treated it as capital expenditure and his action was confirmed by the CIT(A). 41. We find that the Rajasthan High Court in the case of CIT vs. Arawali Constructions Co. (P) Ltd., (2002) 177 CTR (Raj) 79 : (2003) 259 ITR 30 (Raj) held that the expenditure on acquiring computer software was to be treated as expenditure of capital nature. The Court observed as under: "The facts on record are that the payment of Rs. 1,38,360 was not paid for consultancy fee to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained a disallowance of Rs. 50,000 on estimate basis. 46. We have considered the matter and in our opinion the disallowance made by the lower authorities was based on mere conjectures and surmises. Further, the assessee is a company and therefore, there could be no justification for an ad hoc disallowance on the ground of personal or non-business component in the expenses claimed. In taking this view we are fortified by the decision of the Gujarat High Court in the case of Sayaji Iron & Engg. Co. vs. CIT (2002) 172 CTR (Guj) 339 : (2002) 253 ITR 749 (Guj). The Court observed as under: ".... The assessee which is a private limited company is a distinct assessable entity as per the definition of 'person' under s. 2(31) of the Act. Therefore, it cannot be stated that when the vehicles are used by the directors, 'even if they are personally used by the directors' the vehicles are used by the 'personal use'. The limited company is an inanimate person and there cannot be anything personal about such an entity. The view that we are adopting is supported by the provision of s. 40(c) and s. 40A(5) of the Act." 47. We, respectfully, follow the precedent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the AO and ground not adjudicated by the first appellate authority be deleted as per provisions of law and scheme of the Act, The appellant be granted just and proper relief in this respect." 50. It was submitted by the learned Authorised Representative that this issue was raised before the CIT(A) through an additional ground as mentioned by the CIT(A) in para 4 of his order, but the CIT(A) omitted to decide it. In the circumstances, therefore, we remit this matter back to the file of CIT(A) with a direction that he should decide this issue after giving adequate opportunity of being heard to the assessee. The ground No. 7 is decided accordingly. 51. In the result, the appeal filed by the assessee for asst. yr. 2001-02 is partly allowed. ITA No. 588/Pn/2006 : Asst. yr. 2002-03 Ground No. 1 "On facts and circumstances prevailing in the case and as per provisions of law, it be held that the write off of Rs. 75,00,000 should have been allowed in full. It should further be held that amount written off was provided by the appellant company for the business purpose and out of business expediency and claim is allowable under s. 37 and/or s. 28 of the IT Act. Just and pro ..... X X X X Extracts X X X X X X X X Extracts X X X X
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