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TMI Blog2024 (12) TMI 551X X X X Extracts X X X X X X X X Extracts X X X X ..... e is the most essential cash commodity and with a growth in economy demand is also robust. Rather, to be relevant in present scenario Entrepreneurs has to think about their vertical diversification as the traditional business and business model may not be that relevant in growing competition. As astonishing for us that the Ld. DRP and the AO observed the matter in isolation without applying any knowledge of banking industry. The reference of the communication by the bank taken by the authorities below are misplaced as the facility from the Bank of India, Singapore Branch were extended on the behest of strong credentials of the assessee company and its group leader Baidyanath Group and its promoters/shareholders and directors. M/s. PT Equity Commodities and PT Bumi Bera Parkasa (PTBBP-target Company) has no value in the eyes of bankers and as the assessee wants to quit the same once for all, one has to understand their obligations and compulsions also keeping in mind the prevailing market/business practices. Based on above, we are not in agreement with the half cooked view taken by the revenue. To further strengthen the facts of matter in favour of the assessee we placed our relianc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowable expense under section 37(1) or allowable business loss under section 28 of the Act; Transfer pricing adjustment of INR 6, 72,600/- on account of corporate guarantee charges 5.Erred in making transfer pricing adjustment @ 0.5% on account of alleged corporate guarantee provided without appreciating that there was no corporate guarantee which was provided by Appellant to its AE; 6. without prejudice to above, erred in making transfer pricing adjustment on account of alleged corporate guarantee, without giving credit of charges recovered from its AE, wherein such credit was given in original TP order but not given in final order post Hon'ble DRP directions (without any such directions from Hon'ble DRP);without prejudice to above, erred in making transfer pricing adjustment on account of alleged corporate guarantee for the entire year, without appreciating that such guarantee was provided only for part of the year; Levy of interest under section 234B of the Act 8. Erred in levying interest of INR 1, 28, 26, 58,684/- under section 234B of the Act: Initiation of penalty proceedings under section 270A of the Act 9. erred in initiating penalty proceedings under section 270 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n before us is whether this written off of loan given to subsidiary at Indonesia is an allowable expense or not u/s. 37 of the Act. For sake of clarity and ready reference we are reproducing herein below the provisions of section 37 of the Act as under: Section - 37, Income-tax Act, 1961 - FA, 2023 General. 37. (1) Any expenditure (not being expenditure of the nature described in sections 30 to 36 and not being in the nature of capital expenditure or personal expenses of the assessee), laid out or expended wholly and exclusively for the purposes of the business or profession shall be allowed in computing the income chargeable under the head Profits and gains of business or profession . [Explanation 1.] For the removal of doubts, it is hereby declared that any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession and no deduction or allowance shall be made in respect of such expenditure.] [Explanation 2. For the removal of doubts, it is hereby declared that for the purposes of sub-section (1), any expenditure incurred by an assessee on the activities re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... urposes of business of the assessee. The issue as discussed by the authorities below is reproduced as under: 6.1.1 During F.Y. 2006-07, the assessee entered into coal mining business in Indonesia through JV and also provided loan to this JV to repay its debt. The other partners/ managers of the assessee fraudulently took control of coal mining business and hence the JV business of the assessee did not take off. The assessee ultimately sold its entire stake to a 3rd party in the year 2017 for US $ 5000 and also assigned its outstanding loan to the 3rd party for US $ 12,000 and thus claimed the entire outstanding loan as business loss. The assessee claimed an amount of Rs. 8, 91, 78,685/- i.e. loan advanced to subsidiary in Indonesia as revenue expense. Observation of Bench: The fact that the assessee company belongs to the Baidyanath Group of Companies and main Baidyanath Group Company owned Thermal power plant also as stated by the Ld. AR during the hearing of the case and on this fact there was no rebuttal by the Ld. DR. In today s business scenario as a matter of business strategy backward/forward integration of the business entity itself or through its group companies is a commo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the IT act as it was advanced for business expediency. The claim the assessee does was passed the test of allowability under section 37 of the IT act. To define, the 'business expediency the assessee has relied upon the judgement of tax court in the case of S. A. Builder versus. C.I.T. 288 ITR 001. However, the issue involved in the present case is entirely different from the issue involved in the above case. In the case of S.A. builder, the issue of contention was allowability of interest under section 36 (1) (iii) of the IT act w.r.t. advance given to a related company for business expediency. However, in the current case, issue is whether a loan given to a related company can be treated as business loss if the loan becomes bad. I am afraid it is not so. The law is very clear that any loan given to anybody is a capital outgo. The assessee has not claimed that the money was advanced for any business transaction or the related company was going to provide coal or any other services to the assessee against this advance. On the contrary, the assessee itself has claimed that it had advanced loan to the related company to repay its obligations. So, the loan was not at all connecte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esident). It is stated that PEC is a start-up company formed for coal trading and consultancy. 6.2.2 The assessee has further stated that as per the Indonesia mining laws, the conduct of mineral exploration, development and production is regulated by: The Kuasa Pertambangan (KP); which is mining authorization can be owned only by Indonesian nationals or Indonesian owned companies. Thus, a Foreign Investment company cannot hold KP. The Contract of Work (CoW'); can be entered into only by an Indonesian company that can be only partly owned by non-residents/ foreign companies. The CoW covers virtually all minerals except coal and petroleum and addresses all stages of operation and The Coal Contract of Work ('CCoW') can be entered into by an Indonesian company that is at least partly foreign owned, or by an Indonesian wholly owned company. The CCoW applies exclusively to coal operations. 6.2.3With the above background, the assessee has stated that, PT BBP holds a valid license required to extract coal from a coal mine located in Muaro Bungo, Jambi Province, Sumatra, Indonesia (Target Company'), accordingly, the assessee made an arrangement for acquisition of PT BBP thro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5,000 and also assigned the outstanding loan to aforesaid Indonesian party for USD 12,000. Pursuant to which, the net outstanding loan of US $ 20, 12,173/- (INR8, 91, 78,685/-) was written off in the books of accounts of Siddhayu Aayurvedic on27.03.2017 and treated as business / trading loss. 6.2.5 Based on the above arguments, the assesse has contended that the no disallowance shall be made on account of write off loan of INR 8, 91, 78,685/-advanced to subsidiary in Indonesia as the same is in the nature of business expenditure which is revenue. The assessee has argued that Siddhayu Aayurvedic invested in subsidiary and has advanced loan to the subsidiary to procure coal and to be able to sell coal which in turn can be utilized by Siddhayu Aayurvedic for the purpose of its business. Siddhayu Aayurvedic and its overseas subsidiary were in the same line of business and their activities were inter-connected. Siddhayu Aayurvedic had set up subsidiary in Indonesia for the sole purpose of carrying out its power generation operations more economically and for the purposes of expansion. Siddhayu Aayurvedic had deep interest in the operations carried out by the subsidiary. The loan has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... siness or profession under section 28 of the Act as long as it is a trading loss and the same is arising directly from the carrying on of the business and incidental to it and in this regard, relied on the decisions of Hon'ble Supreme Court in the case of Badridas Daga [1958] 34 ITR 10 and Ramchandar Shivnarayan [1977] 111 ITR 263 wherein it is held that If there is a direct and proximate nexus between the business operation and the loss or it is 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. 6.2.10the assessee has also drawn our attention to decision of Jurisdictional Bombay High Court in the case of Cable Corporation of India. Ltd. [2016] 75 taxmann.com 117 wherein it is held that even a single/solitary transaction could by itself be classified as a business transaction and loans given to the subsidiary on account of business expediency so that the banks do not adopt legal proceedings against the assessee, was considered as loans given for the purpose of business. The assessee has also drawn our attention to decision to the decision in the case of ACE Designers Ltd vs. CIT [2020 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purpose of the business of the taxpayer. The advance been made in the normal course of business of the taxpayer when written off had to be held as revenue field and advances written off are allowable as deduction either as bad debts or as business loss, incidental to carrying on the business by the taxpayer. 6.2.13 To conclude the assessee has argued that where expenditure/ proposed activity forms part of existing business and no new asset is created or fructified, the expenditure on such account is revenue in nature and placed reliance on the following decisions in this regard: Tamilnadu Magnesite Ltd V. ACIT [2018] 407 ITR 543 (Madras HC) CIT v Graphite India Limited [1996] 221 ITR 420 (Cal HC) CIT v Tata Robins Fraser Ltd [2012] 253 CTR 227 (Jharkhand HC) Idea Cellular Ltd v Addl. CIT [2016] 76 taxmann.com 77 (Bom HC) Binani Cement Ltd v. CIT [2016] 380 ITR 116 (Cal HC) 6.2.14 Thus, based on the above arguments, the Assessee has submitted that the assessee company has advanced loan to subsidiary for carrying out its trading operations indirectly by serving off its debt and if such loan were not provided by Siddhayu Aayurvedic, it would have impeded its current operational busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le by opencast method of mining 2. To suggest it technically safe and sound method of excavation 3. To draw the choir really outs showing progress of excavation and Kobe dump at 1 year interval up to year 5 for annual production of 0.6 to 0.7 Mt. of coal/and indicating the aid yet to be acquired for excavation, Kobe dump and also for construction/diversion of roads and streams. III. Terms and conditions communicated by Bank of India to M/s. P T Equity Commodities vide letter dated 09.06.2008 for Additional Term Loan of US $ 8.00 mns. And Working Capital by way of Revolving Loan for US $2.90 mns, sanctioned in terms and conditions as per Annexure-l enclosed. IV. Terms and conditions revised by Bank of India vide letter dated 17.07.2008 addressed to M/s. P T Equity Commodities. V. Sanction of banking facilities by Bank of India vide letter dated 18.11.2008addressed to PT Equity Commodities for Term Loan: US $ 8.00 mn and Working Capital Demand Loan for US $2.90 mn communicating change of properties offered as security, waiver of processing charges and accepting of alternate security in lieu of assignment of mining rights. VI. Loan agreement among PT Equity Commodities (the Lender' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts generation. And even though the assessee claims that the assessee company has entered into an agreement with PEC to provide interest free loan to PEC to the extent of INR 8,99,55,565/- from the Financial years 2007-2015 for meeting its funding requirements i.e. to facilitate the PEC's liability to honour its repayment liabilities against the loan availed by it from Bank of India, Singapore Branch, there is no evidence which may suggest that the assessee has carried out any activity to set up any thermal power plants during this period. The financial statements of the assessee for the financial years 2007-2015 do not show any 'capital work in progress' towards setting up of any thermal power plants. We have noted that as per assessee own admission it is only after the term loan was squared off by PEC, the shareholders and Indonesian citizens of Nominee company PT DMJ, namely Mr. Akhirudin and Mr.Haloman Wahyudi Pasaribu denied every claim of PEC over the assets and profits of PT BBP and PT DJ, therefore, we find no justifiable reason for not carrying out any activity for setting up of thermal power plant prior to that. Merely relying on project report for the said th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equity stake in a coal mine located at Muara Bungo, Sumatra held by a company PT Bumi Bara Perkasa ('PT BBP') through a foreign JV called PT Equity Commodities (PEC'), the balance 45% shares were held by two individuals, Mr. Rajiv Behal (who was then a non-resident Indian) and Mr. Vinay Hariani (an Indonesian resident). It is stated that PEC is a start-up company formed for coal trading and consultancy. 6.3.6 In this regard, we may rely on the judgment of Karnataka High Court in the case of United Breweries Ltd. v. Assistant Commissioner of Income-tax, Central Circle-2(3), Bangalore [2015] 54 taxmann.com 8 (Karnataka) wherein during the financial year ending on 31-3-2001, the assessee made a claim of Rs. 1.42 crore as bad debts written off, including the amount of Rs. 1.28 crore which was given as a loan to the subsidiary company and it was held that when the assessee is in the business of manufacture and sale of beer and liquor, if they have lent money to a sister-concern, may be a subsidiary, for the purpose of setting up a new line of business, it cannot be said that the money lent by them to the subsidiary company as an assistance could be characterized as an expen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and preparatory expenses which are incurred prior to setting up of business and prior to coming into an existence altogether new source of income as set out above, these expenses cannot be allowed as revenue expenditure as per provisions of Section 3 and 4 of the Act. 6.3.8 Identical is the view in the following judgements: A. E.I.D. Parry (India) Ltd. v. Commissioner of Income-tax [2002] 257 ITR 253 (Madras) wherein Assessee was engaged in manufacture of certain products - Wanting to add a new product, it incurred expenditure by way of entering into a collaboration agreement for purchase of machinery over a period of time from 1975 to 1978 - Subsequently, it abandoned said project and claimed deduction on account of expenditure incurred for said project in assessment year 1981-82 it was held that That the expenditure was incurred for the purpose of setting up a new project. The expenditure had been incurred in the years prior to the assessment year in question. The assessee's case that it subsequently abandoned that project does not on that score convert what was an expenditure in the nature of capital expenditure into a revenue expenditure. The setting up of a new project w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vised by Bank of India vide letter dated 17.07.2008 addressed to M/s. P T Equity Commodities. III. Sanction of Banking Facilities by Bank of India vide letter dated 18.11.2008addressed to M/s. PT Equity Commodities for Term Loan: US $ 8.00 mn and Working Capital Demand Loan for US $2.90 mn communicating change of properties offered as security, waiver of processing charges and accepting of alternate security in lieu of assignment of mining rights. 6.3.9 It is noted from the above documents that the principal security for Sanction of Banking Facilities by Bank of India vide letter dated 18.11.2008addressed to M/s. PT Equity Commodities for Term Loan: US $ 8.00 mn and Working Capital Demand Loan for US $2.90 mn as per modified terms were as under [Page 467 of Paper Book]: (a) Assignment of mining and marketing of coal agreement between M/s. PT Equity Commodities and PT Bumi Bera Parkasa (PTBBP-target Company). (b) Fiduciary deed of stocks of PT Bumi Bera Parkasa. (c) Fiduciary deed of movable assets of M/s. P T Equity Commodities. (d) Fiduciary deed of receivables of P T Equity Commodities. Both the entities i.e. PT Equity Commodities and PT Bumi Bera Parkasa (PTBBP-target company), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty Survey No. 1548/1, Street No. 17/56, Henessey Road, Civil Lines, Mouje, Stiabuldi, Nagpur 2500 Sq.ft (232.25Sq. Mt.) 237(USD 0.515Mn.) 1US$=Rs.46.00 TOTAL 1575(USD 3.423Mn) And, it is assessee own admission that it is primarily on the credit worthiness of the promoters of Siddhayu Aayurvedic supported by corporate guarantees of three Baidyanath Group companies coupled with collateral security, Bank of India-Singapore Branch, sanctioned credit facilities to PEC for a sum of USD 10.90 million for acquisition and working capital/ trade finance purposes of the aforesaid coal block. Therefore, what were next under threat were primarily the assets of the promoters of Siddhayu Aayurvedic for which Equitable Mortgage was created at Nagpur Corporate Banking Branch to repay the loan. 6.3.12 Moreover, joint and several guarantees for US dollar 10.9 MN were to be signed by Mr. Suresh Kumar Sharma, Pranav Kumar Sharma, Mrs. Kalpna Sharma (wife of Suresh Kumar Sharma), Mr. Siddhesh Kumar Sharma, Mr. Rajiv Bahal and Mr. Vinay Hariani, besides several and independent corporate guarantee for an identical amount of US dollar 10.9 MN by Siddhayu Research Foundation Private Limited, PT Dharam Miner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the claim of the Assessee was that Loans and advances, promotional activities, etc., in our opinion, are not outside the objects of the assessee-company as per its Memorandum of Association and hence the loss arising in writing off the loans and advances is liable to be treated as loss incurred in the course of carrying on its business and allowable as deduction in the years under consideration. Similarly, the expenditure incurred on the aborted projects in the wake of the decisions mentioned herein above, is allowable as revenue expenditure. As far as the year of allowability is concerned, neither the assessing officer nor the first appellate authority disputed the bona fides of the assessee in writing off the amounts in the year under consideration. 13. In arriving at the above conclusion, the ITAT relied on the decisions of the Supreme Court in CIT v. Amalgamation (P.) Ltd. [1997] 92 Taxman 132/226 ITR 188 and Essen (P.) Ltd. v. CIT [1967] 65 ITR 625 (SC) and of the Calcutta High Court in CIT v. Gillanders Arbuthnot Co. Ltd. [1982] 9 Taxman 76/138 ITR 763. 14. In the present case, while the nomenclature used for the expenditure incurred may have been different during AYs 1989-9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Industries Ltd. [1976] 103 ITR 715 (Guj) as also in case of Dy. CIT v. Core Health Care Ltd. [2008] 298 ITR 194/167 Taxman 206 (SC) would have no bearing. 14. Learned senior advocate Shri Soparkar has empathetically urged that both the authorities in the earlier year and in the present year had held the issue in favour of the assessee pointing out that this expenditure was in connection of expansion of the existing business. The Court on elaborate discussion had confirmed such a view of these authorities, and therefore, the interest expenses or otherwise, would get covered for the same being expenditure in connection with expansion of the business. 15. On due consideration of rival submissions, we notice at this stage that this Court, while adjudicating the said issue, had at length discussed the same to hold that the expansion since was of an existing business, the tests applied in case of Alembic Glass Industries Ltd. (supra) as also in case of Core Health Care Ltd. (supra) would have relevance and the borrowings were whether capital or revenue expenditure would be of no consequence. Profitable it would be to reproduce these observations made in this respect, which reads thus: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the CIT (Appeals) and the Tribunal, we have no reason to interfere with the ultimate conclusion. Had it been a case of entirely a new project undertaken by the assessee as canvassed by the counsel for the Revenue, a serious question of claiming pre-operative expenditure of interest by way of revenue expenditure would arise. However, when the authorities below found that it was an expansion of the existing business, applying the tests laid down by this Court in the case of Alembic Glass Industries Ltd. (supra), in view of the decision of the Supreme Court in the case of Deputy CIT v. Core Health Care Ltd, 298 ITR 194 (SC), the fact whether the borrowing is capital or revenue expenditure would be of no consequence. 15.1 Question, as raised in the instant case, does not speak of the interest. In light of the observations made earlier, decision relied upon by this Court; this would be clearly covered and needs to be held in favour of the assessee. [2023] 155 taxmann.com 229 (SC) PCIT v. Wadia Ghandy Co. 2. The Respondent-Assessee is a partnership firm. The assessee paid certain amount to a retired partner on the basis of the provisions made in the partnership deed. The deed provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n relation to the period during which he was a partner and which profits had not been realized by the firm on account of non-completion of the work during the tenure of the partner. The assessee firm further pointed out that it would be paying taxes on the entire fees received by it in the year in which the bills would be raised. This was also including capital gains on the sale of the immovable properties, without claiming any depreciation in those years in respect of which payments to the outgoing partner were made. 3. The assessing officer did not accept the stand and disallowed the expenditure. The assessee carried the matter in appeal. Tribunal by impugned judgment referred to and relied upon the earlier decisions on the point to accept the assessee's stand. It appears that the assessee had taken both the grounds namely, that the expenditure was made to discharge the obligation undertaken by the firm as per the relevant clause of the partnership agreement and further that essentially this was a case of diversion of income at source. 4. We notice that similar questions have been considered by this Court on numerous occasions. In case of Commissioner of Income-tax v. Mulla a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted facts are that the partnership firm envisaged payment to an outgoing partner on the basis that the partner would have rendered service during his tenure as a partner of the firm but could not enjoy the fruits thereof on account of the fact that the work having remained incomplete, the concerned client had not been billed for the work already done. In similar circumstances, the courts have held that payment to the partner would amount to diversion of income at source by overriding title. No substantial question of law arises for our consideration. The income tax appeal is dismissed. [1961] 41 ITR 414 (SC) Commissioner of Income-tax v. Royal Calcutta Turf Club Ltd The respondent is an association of persons whose business is to hold race meetings in Calcutta on a commercial basis. It holds two series of race meetings during the two seasons of the year. The respondent does not own any horses and, therefore, does not employ jockeys but they are employed by owners and trainers of horses which are run in the races. It is a matter of some importance to the respondent that there should be jockeys available to the owners with sufficient skill and experience because the success of races ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espondent to see that the races are not abandoned on account of the scarcity of jockeys. In the order of the Tribunal it is stated that this was not the case of the respondent, and, therefore, when the respondent wanted paragraph 5 of the statement to be substituted by the following: It was the case of the assessee that unless it trained Indian jockeys, a time may come when there may not be sufficient number of trained jockeys to ride horses in the races conducted by the assessee, the Tribunal did not agree to do so. Counsel for the appellant raised three points before us: (1) The question as to whether an item of expenditure is wholly and exclusively laid out for the purposes of business or not is a question of fact; (2) the connection between an expenditure and profit-earning of the assessee should be direct and substantial and not remote; and (3) to be admissible as revenue expenditure it should not be in the nature of a capital expense, i.e., it should not bring into existence an asset of an enduring nature. As to the first question this court has held in Eastern Investments Ltd. v. Commissioner of Income-tax [1951] 20 ITR 1 that though the question must be decided on the facts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to make its business profitable it was necessary that there were jockeys of requisite skill and experience in sufficient numbers who would be available to the owners and trainers because without such efficient jockeys the running of race meeting would not be commercially profitable. It was for this purpose that the respondent started the school for training Indian jockeys. If there were not sufficient number of efficient Indian jockeys to ride horses its interest would have suffered, and it might have had to abandon its business if it did not take steps to make jockeys of the necessary calibre available. Therefore, any expenditure which was incurred for preventing the extinction of the respondent's business would, in our opinion, be expenditure wholly and exclusively laid out for the purpose of the business of the assessee and would be an allowable deduction. This finds support from decided cases. In Commissioner of Income-tax v. Chandulal Keshavlal Co [1960] 38 ITR 601. This court held that in order to justify a deduction the disbursement must be for reasons of commercial expediency; it may be voluntary but incurred for the assessee's business; and if the expense is incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the New Zealand statute was much narrower than the language of rule 3A in England. Reference was also made, by the appellant to Boar land v. Kramat Pulai Ltd [1953] 2 All E.R. 1122. In that case directors of three companies engaged in tin mining in Malaya incurred expenditure on printing and circulating to shareholders a pamphlet containing remarks of the chairman of the company. The pamphlet was an attack on the policy and acts of the socialist Government and it was held that the question whether the money was wholly and exclusively laid out or expended for the purpose of trade within the meaning of rules applicable to the question was one of law, but on a consideration of the question it was held that the expenditure was not solely incurred with that object. It is not necessary to discuss that case at any length because what was held in that case was that the pamphlet was not wholly and exclusively for the purpose of the company's trade. Applying the law, as laid down in those cases, to the present case the conclusion is that the amount in dispute was laid out wholly and exclusively for the purpose of the respondent's business because if the supply of jockeys of efficien ..... X X X X Extracts X X X X X X X X Extracts X X X X
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