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TMI Blog2012 (12) TMI 287X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the business income of the appellant. 5. The learned Commissioner (A) on the facts of the case ought to have appreciated that the various case law cited by the assessing authority had no application and on the other hand the cases cited by the appellant were fully supports the case of the appellant and thus the deduction claimed ought to have been allowed in full." 4. The assessee is a company which is engaged in the business of manufacture of drugs and pharmaceuticals. In the profit & loss account, the assessee had debited a sum of Rs.1,89,90,481 as bad debts /advances written off. The profit as per the profit & loss account was arrived at by the assessee after claiming the aforesaid deduction. The question before the AO was as to the allowability of the aforesaid claim of deduction by the assessee. The Assessee gave a sum of Rs.1,96,08,954/- as loan/advance to its 100% subsidiary, M/s. Rubtech Exports Pvt. Ltd. ("Rubtech" for short). Rubtech was formed for the purpose of carrying on the business in bioinformatics and biotechnology. The amount borrowed by Rubtech from the assessee was utilized for making investments in equity shares of an American company by name Biosift Inc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Development and adoption of new technology world wide Kemwell has been working with leading companies like Becton and Dickenson USA and with Phamacia Biotechnology, Sweden as their Indian partners. Whilst the proposed Joint Venture in this application shall focus on Bioinformatics, the Company is also in the process of setting up in parallel a biotech division in India specializing in diagnostics, gene expression, gene therapy and microarray (biochip) in biotech." (Note: Kemwell is Assessee in this appeal) 8. Along with the aforesaid application, the Assessee also gave a profile of Kemwell, in which it has been explained that the direct investment in a joint venture of BI was done only for the purpose of a strong base in Bioinformatics. In this regard, it has also been explained in the profile as follows:- "Kemwell's progress to capitalize Biotechnology Kemwell being a progressive company has always laid emphasis on Research and Development and adoption of new technologies for furthering its own and its customer's interest. In tune with the development of biotechnology world wide Kemwell has been working with leading companies like Becton and Dickenson USA, and with Pharmacia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a in general e.g., * It shall catapult in Indian entry to access the tap of Biotechnology research in the world-unlike most current Indian biotech companies, which are at the bottom of the value chain. * The investment has a strategic alliance for outsourcing from India which shall generate employment and foreign exchange to India. * Biosift's projection show profits and it is hoped that there will be dividend flows into the country from year three onwards. * The relationship could lead to sophisticated research projects in academic institutions in India such as Indian Institute of Science, Centre for Cellular and Molecular Biology, National Botanical Research Institute and Institute of Microbial Technology." 11. The assessee also filed an agreement between Rubtech & BI dated 10.06.2001 whereby BI agreed that it will outsource all its work in India through Rubtech, because Rubtech was investing in the share capital of BI. This agreement is basically for Rubtech agreeing to invest in the shares of BI. There was also another outsourcing agreement dated 10.06.2001 called 'Outsourcing Agreement' between Rubtech and BI, whereby BI has agreed to outsource work in India through Rubt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his regard is well settled that a direct loss not being a capital loss has to be allowed as a deduction, while computing the income. The loss in the commercial sense like theft or dacoity is a trading loss. If there is a direct and proximate nexus between the business operation and the loss or incidental to it, then the loss is deductible, as without the business operation and doing all that is incidental to it, no profit can be earned. The direct and proximate connection and nexus must be between the business operation and the loss. The above proposition emanates from the decision of the Hon'ble Supreme Court in the case of Ramachandar Shivnarayan v. CIT 111 ITR 263 (SC). Therefore the question will revolve around the facts of each case as to whether there was a direct and proximate nexus between the business operation and the loss or was it incidental to it. The above being the legal position, we would proceed to examine as to whether factually it could be said that there was any nexus between the loss in the present case with the business of the assessee or was it incidental to the business of the assessee. 16. The Assessee was in the business of manufacture and trading of dru ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso derived income from investment in Government securities. In years both preceding and succeeding the relevant accounting year, the assessee had sold Government securities and bonds. A sum of Rs. 50,000 borrowed from a creditor for the purpose of purchasing Government securities, was brought in cash to Rajahmundry by its employee and was handed over to its cashier. At a time when the cashier had turned his back to take out some books, a stranger suddenly arrived at the place of the assessee's business and committed theft of Rs. 30,000. In spite of lodging a complaint with the police the amount could not be recovered. The assessee claimed deduction of Rs. 30,000 as a business loss in computing its profits and the Tribunal allowed the claim on the ground that the loss was incidental to the carrying on of its business. On a reference at the instance of the Commissioner, the High Court held that the loss was not allowable as a deduction as the loss was not incidental to the assessee's business. On further appeal, the Hon'ble Supreme Court explained the principle applicable when a claim for deduction is made u/s.28 of the Act in the following words: "Under section 10(1) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n'ble Supreme Court had occasion to deal with a case where the assessee, a dealer in automobiles and spare parts, had subscribed to certain Government Loans. It sustained a loss of Rs. 53,650 while selling them and claimed that the loss was a revenue loss. The Appellate Tribunal found that, having regard to the sequence of events and the close proximity of the investment with the receipt of Government orders for motor vehicles, the conclusion was inescapable that the investment was made in order to further the sales of the appellant and boost its business and that the investment was made by way of commercial expediency for the purpose of carrying on the business and, therefore, the loss suffered by the appellant on the sale of the investment was a revenue loss. On a reference, the High Court re-examined the facts on record and held that the investment was not connected with the orders placed by the Government with the assessee and held that the loss was a capital loss. On appeal to the Supreme Court it was held by the Hon'ble Supreme Court that, on the facts, no enduring benefit was derived by the assessee by the investment and that the Tribunal was right in its conclusion that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore see the facts of the present case to find out if the loss in the present case can be said to have any direct or proximate nexus between the business operation and the loss or was it incidental to it. We have already seen the circumstances under which the loan in question came to be advanced by the Assessee to Rubtech. We have also seen that Biotechnology which was the purpose of the joint venture was a forward integration of the business of the Assessee. It was the stand of the ld. DR that virtually the loan to Rubtech was investment in the capital of Biosift by Rubtech and that Rubtech was only a conduit and that it was the intention of the Assessee to invest in the capital of Biosift. If one were to proceed on the presumption that it was direct investment by Assessee in the capital of Biosift or a loan by the Assessee to Rubtech, the intention of the loan was to further the business interest of the Assessee and it was not a case of making investment with a view to get returns on such investments alone. We have already referred to the various correspondence/applications for permission to RBI for making investment by Rubtech in the share capital of Biosift. A holding and subsi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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