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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 ..... a view to enter field of biotechnology. - The fact that the venture did not take off as expected cannot be the basis to say that the loan by the Assessee to Rubtech for making investment in share capital of Biosift was not given without business interest in mind and was a mere investment for returns - Claim of the Assessee for deduction on account of loss on account of write of debts due by Rubtech has to be allowed - appeal of assessee is allowed. - ITA No.1019/Bang/2010 - - - Dated:- 24-7-2012 - SHRI N. BARATHVAJA SANKAR AND SHRI N.V. VASUDEVAN, JJ. Appellant by : Shri S. Parthasarathi, Advocate Respondent by : Shri S.K. Ambastha, CIT-I(DR) ORDER Per N.V. Vasudevan, Judicial Member This appeal by the assessee is against the order dated 20.05.2010 of the CIT(Appeals), LTU, Bangalore, relating to assessment year 2006-07. 2. Ground No.1 is general in nature and calls for no specific adjudication. Ground No.2 was not pressed and the same is dismissed as not pressed. 3. Grounds No.3 to 5 read as follows:- 3. The learned Commissioner (A) ought to have allowed the loss of Rs.1,89,80,481/- on account of irrecoverable advance written off. 4. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act. It is in these circumstances that the question arose for consideration before the AO as to whether the loss was incidental to the business of the assessee and could be allowed as a deduction. 6. The AO was of the view that the loss in question was a loss of capital and could not be allowed u/s. 28 of the Act. In other words, the loss was not incidental to the business of the assessee. The ld. CIT(Appeals) confirmed the order of the AO giving rise to the aforesaid grounds of appeal by the assessee before the Tribunal. 7. We have heard the rival submissions. We shall first refer to the evidences available on record to see if the loss in question can be said to be incidental to the business of the assessee or arising out of business of the assessee. Rubtech wanted to invest in shares of BI, for which it applied for permission from the RBI. On 20.06.2011 an application to RBI was made. The application reads as under:- At the outset, let me introduce ourselves. Our company Rubtech till now a dormant company has been activated with a singular purpose of having Biotechnology as its core activity and for taking over all Biotechnology and related activities of Kemwell Group, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscussions regarding Streptokinase a drug developed with new delivery mechanism. Further discussions are under advanced stage with Dr. William J. Rutter, founder of Chiron Corporation and presently Chairman Emirates of Chiron, Praxsys Corporation USA, Silgene Inc., to enter immuno diagnostics for infectious diseases and to develop new tests on India prevalent diseases. Genomic studies on tissues using antibiotics and data mining for both diagnostics and tissues, Biosciences facility for DNA diagnostics, DNA sequencing, Gene expressing and mapping, Genetic screening, plant Genomics, Genomics, Pharmacogenomics, Toxicogenomics and Bioinformatics data mining and compilation for the above. 9. Further in the application form, Rubtech has explained the existing line of activity of the assessee as follows:- (v) Existing Line of Activity (Rubtech Exports Pvt. Ltd.): Core activity in Biotechnology and Bioinformatics Existing Line of Acitivity (Kemwell Ltd.) : Manufacturing of pharmaceuticals and Biotechnology Research (v) Years of experience in the line of Activity (Rubtech Exports Pvt. Ltd.) : New company Years of experience in the line of Activity (Kemwell Ltd.): About ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he investments made in BI, as BI became bankrupt. Rubtech s net worth was also negative and therefore the assessee could not recover anything from Rubtech and therefore had to write off the loss as incidental to the business of the assessee. 13. According to the assessee, the loan to the subsidiary which was for the purpose of investment in BI, was for the purpose of enabling the assessee to expand its business and to enter US markets with a view to develop bio-medical products and was therefore incidental to the business of the assessee and the loss claimed had to be allowed as a deduction. 14. The ld. DR, on the other hand, while reiterating the stand of the revenue authorities as reflected in the order of the ld. CIT(Appeals), submitted that the amount advanced to the subsidiary was purely an investment for the purpose of earning returns and had no nexus with the business of the assessee. He also brought to our notice that the Board Resolutions before making investments both by Rubtech as well as by the assessee, were identically worded. According to the ld. DR, the monies advanced was purely on capital account and the loss in question has to be treated as a capital loss. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6-2001 Rubtech had a right to nominate a director in the board of directors of Biosift. By letter dated 17.9.2001 RBI gave its approval for the proposed investment by Rubtech in the share capital of Biosift. It is not in dispute that the Assessee advanced a sum of Rs.1,96,08,954/- to Rubtech. The amount was shown under the head Loans and Advances . Rubtech in turn used the monies so borrowed from the Assessee in making investments in the share capital of Biosift. Biosift could not perform well. Value of Rubtech s investment in Biosift eroded. Rubtech decided to sell its investment in Biosift. By doing so Rubtech could recover a sum of Rs.6,28,473/. The remaining sum of Rs.1,89,80,481/- was loss Rubtech suffered on sale of its investments. Rubtech could not repay the loan to the Assessee to the extent of Rs.1,89,80,481/-. The Assessee therefore wrote off the said sum as loss incidental to business. The question is as to whether the claim of the Assessee for deduction on the above facts and circumstances can be allowed. The parties agreed before us that the claim of the Assessee has to be tested on the parameters laid down in Sec.28 of the Act. 17. The test that to be applied i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t while arriving at the true figures of the assessee's income in the commercial sense. The list of permissible deductions in either of the Acts is not exhaustive. We may just refer to section 10(2)(xv) of the 1922 Act corresponding to section 37 of the 1961 Act. The relevant words of the said provision, namely, "any expenditure ... not being in the nature of capital expenditure or personal expenses of the assessee laid out or expended wholly and exclusively for the purpose of such business..." occurring in either of the two provisions has not been able to take within its ambit loss of property or money by theft or dacoity as it is not an expenditure which has an element of volition, but a forced loss . It is to be remembered 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 sale proceeds of the stockin- trade or for disbursement to meet the 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding asset or as part of circulating capital embarked in the business. But, if on the other hand, the foreign currency is held as a capital asset or as fixed capital, such profit or loss would be of capital nature. It was the learned DR s contention that the advance to Rubtech has nothing to do with the business of the Assessee and therefore the loss in question has to be taken as capital loss and cannot be allowed as deduction. In this regard the learned DR placed strong reliance on the letter dated 13.3.2006 by Rubtech to the Assessee whereby they sought waiver of repayment of the loan availed by them from the Assessee for making investment in the share capital of Biosift wherein they have mentioned that the investment in the capital of Biosift was to earn good return. We have seen that letter and find that the letter also specifies that the investment was made to have business connection with Biosfit and therefore this letter cannot be the basis to conclude that the loss in question was a capital loss. 20. The claim of the Assessee has therefore to be tested on the parameters laid down in the decisions of the Hon ble Supreme Court referred to above. As observed by the Hon ble ..... X X X X Extracts X X X X X X X X Extracts X X X X
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