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TMI Blog1984 (4) TMI 143X X X X Extracts X X X X X X X X Extracts X X X X ..... in holding that the interest of Rs. 1,05,515 receivable by the assessee-company from the subsidiary company, but waived by the assessee, was not a permissible deduction ; 4. that the Commissioner erred in treating the sitting fees, which are more in the nature of reimbursement of expenses, as salary of director within the meaning of section 40A(5) of the Act. 3. The relevant facts of the case are briefly as follows: On examination of the assessment records of the assessee-company for the assessment year 1977-78, the Commissioner found that the assessment order for the assessment year 1977-78 passed by the IAC in the assessee's case was erroneous insofar as it was prejudicial to the interests of the revenue in several respects. He, therefore, initiated proceedings under section 263 and as required under the law, gave the assessee-company an opportunity of being heard by his notice dated 13-1-1981. 4. Before the Commissioner, the preliminary objection to the proceedings under section 263 was raised that the assessment order in question had already been the subject-matter of appeal before the Commissioner (Appeals), the latter had passed his appellate order thereon on 27-12-1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rloskar Kisan Equipment Co. Ltd., a wholly-owned subsidiary of the assessee-company. The assessee's explanation for this waiver was that the assessee had advanced an aggregate amount of Rs. 23.78 lakhs to the said subsidiary by way of loans, on which interest was payable by the subsidiary, that, however, finding the subsidiary to be in a critical financial condition due to tremendous slump in the demand for the products of the subsidiary, the assessee-company had decided to waive the interest previously charged to the said loan account. It was submitted that as the poor financial condition of the subsidiary would have adversely affected the parent company, the latter, in its own interest, had to keep the subsidiary as a viable unit, and since it would have been impossible for the subsidiary to discharge this liability towards interest, the assessee-company took the initiative for saving the subsidiary from financial disaster and, accordingly, waived the interest in question. In support of this submission and of the claim for allowance of the interest so waived, the following decisions of the Supreme Court were cited before the Commissioner, i.e., CIT v. Chandulal Keshavlal Co. [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relevant case laws including the Patna High Court decision in Pandit Lakshmi Kant Jha v. CIT [1980] 124 ITR 470 (Pat.) on the subject and had come to the conclusion that once the AAC appellate authority passed an appellate order, the Commissioner cannot have jurisdiction under section 263 to revise the assessment order. 9. Countering these arguments, Shri K.A. Sathe, the learned departmental representative, made the following points : That the Special Bench of the Bombay Tribunal, while dealing with the case of Dwarkadas Co. (P.) Ltd., did not have the benefit of the decision of the Full Bench of the Madhya Pradesh High Court in the case of CIT v. R.S. Banwarilal [1983] 140 ITR 3, wherein the Court has pointed out that in view of the Supreme Court decision in the case of CIT v. Amritlal Bhogilal Co. [1958] 34 ITR 130, it is obvious that the Bombay view expressed as obiter dicta in CIT v. Tejaji Farasram Kharawala [1953] 23 ITR 412 (Bom.) and followed in Amritlal Bhogilal Co.'s case, is no longer good law. Shri Sathe added that the Special Bench of the Tribunal was not right in distinguishing the decision of the Bombay High Court in Sakseria Cotton Mills Ltd.'s case. Shri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e relevant case law. In our view, the decision of the Bombay High Court in the case of Sakseria Cotton Mills Ltd., as explained by the Full Bench of the Madhya Pradesh High Court in the case of R.S. Banwarilal, does effectively meet the preliminary objection on behalf of the assessee-company. To arrive at the decision in the aforesaid case, the Bombay High Court has relied on the observations of the Supreme Court in the case of State of Madras v. Madurai Mills Co. Ltd. AIR 1967 SC 681 on the doctrine of merger and the scope of its applicability. The observations are as follows : "....But the doctrine of merger is not a doctrine of rigid and universal application and it cannot be said that wherever there are two orders, one by the inferior Tribunal and the other by a superior Tribunal, passed in an appeal or revision, there is a fusion or merger of two orders irrespective of the subject-matter of the appellate or revisional order and the scope of the appeal or revision contemplated by the particular statute. In our opinion, the application of the doctrine depends on the nature of the appellate or revisional order in each case and the scope of the statutory provisions conferring th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at issue, which is apparently in conflict with the decision of the same Court in the case of R.S. Banwarilal. It must, however, be noted that the decision in the case of R.S. Banwarilal is later (8-3-1982) than that in the case of Mandsaur Electric Supply Co. Ltd. (25-2-1982). Besides, in the case of Mandsaur Electric Supply Co. Ltd., the entire order of the assessment was set aside under section 263, whereas, in the present case, directions have been issued by the Commissioner only on specific points. It is common ground that none of the points dealt with in the appellate order of the Commissioner (Appeals), in the case of the assessee-company, Kirloskar Oil Engines Ltd., is touched by the impugned order passed by the Commissioner under section 263. The preliminary objection is overruled. 13. As for the second and the alternative preliminary ground, suffice it to say that the Commissioner had come across the fact that certain claims on account of expenses, which were made by the assessee, were allowed by the ITO, but which, in the view of the Commissioner, were not admissible on facts and in law. The allowance of such claims, thus, would obviously cause prejudice to the interest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pany, was held to be admissible as a business loss. In the latter case, the voluntary waiver of a substantial portion of a loan on finding that the debtor was not in a position to repay the outstanding dues was held to be a trading loss, on the reasoning that the assessee, in the course of its business, had thought it necessary to waive a portion of the outstanding dues. 14.2 Summing up his arguments, Shri Inamdar submitted that the Commissioner has erred in overlooking all these legal aspects and has equally erred in law in substituting his own judgment in place of that of the board of directors, who had considered it commercially expedient to waive the accrued interest in question. He urged that in these circumstances, the decision of the Commissioner deserves to be reversed. 14.3 Shri Sathe, the learned departmental representative, on his part argued that in order to judge the admissibility of the claim of waiver of interest, the correct financial position of the subsidiary company was relevant. According to him, the financial condition of the subsidiary was not critical as made out, but there may have been a temporary set back. In this regard, Shri Sathe drew our attention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e-company's investment, the onus to prove this was on the assessee for an extraneous motive and the purpose could not be relevant, but it should only be 'for earning the income' that is relevant. Proceeding further, Shri Sathe submitted that the Supreme Court decisions in Chandulal Keshavlal Co.'s case and Birla Gwalior (P.) Ltd.'s case were distinguishable on facts from the assessee's case for the interest in question accrued to the assessee-company from day to day, whereas the managing agency commission dealt with in the Supreme Court cases, arose only on the settling of accounts for the relevant previous year and it was waived before its accrual. That similarly, the Madras High Court decision in Amalgamations (P.) Ltd.'s case was also distinguishable being in the case of an investment company, which the present assessee-company is not. Shri Sathe urged that the disallowance of the interest in question was, thus, in order both on facts and in law. 15. In his rejoinder, Shri Inamdar submitted that it was an incontrovertible fact that the subsidiary company had been making losses for consecutive years since it commenced business, that, however, the directors did not, for obviou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubsidiary company from further financial decline by waiving the interest which, in accordance with the mercantile system of accounting regularly followed by the assessee, had technically accrued to it. Viewed in this perspective, we find that the ratio decidendi in the cases of Chandulal Keshavlal Co. and Shoorji Vallabhdas Co. is applicable to the present case. We may mention here that, in similar circumstances, the Madras High Court has, in the following cases, held that the commercial and business realities of the situation have to be taken into account rather than the technical aspects such as the accounting principles---CIT v. Motor Credit Co. (P.) Ltd. [1981] 127 ITR 572 (Mad.) and CIT v. Devi Films (P.) Ltd. [1983] 143 ITR 386 (Mad.). 17. We also find that in similar circumstances, the Punjab and Haryana High Court has in two cases, viz., Shiv Parkash Janakraj Co. (P.) Ltd. v. CIT [1978] 112 ITR 872 and CIT v. Ferozepur Finance (P.) Ltd. [1980] 124 ITR 619, held that the assessee was justified in not making any debit entries in the account of the debtor on account of interest and corresponding credit in its interest account in view of the weak financial position of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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