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TMI Blog2004 (4) TMI 260X X X X Extracts X X X X X X X X Extracts X X X X ..... (India) Ltd. were two different separate legal entities. Just because they were the subsidiaries of the assessee company, it cannot be said that the business of these two companies was the business of the assessee itself. It is sine qua non to consider here the nature of advantage, which the assessee has derived, in commercial sense by advancing the funds to the subsidiaries. It is evident that the purpose was to earn interest. This is the immediate advantage the assessee is deriving. Rescuing the subsidiary companies from the financial crisis is the other reason. This advantage is also in the capital field. As such, the loss was also occasioned in the capital field. Having regard to the facts and after considering the precedents available on the point, I am inclined to concur with the decision of the learned Accountant Member on this issue. Final Decision: The appeal of the assessee was dismissed, and the addition was confirmed as a capital loss, not deductible in computation of business profits. - HON'BLE M.K. CHATURVEDI, VICE PRESIDENT, MUKUL SHRAWAT, JUDICIAL MEMBER AND D.K. SRIVASTAVA, ACCOUNTANT MEMBER For the Appellant : M.M. Galwala and F.H. Bilimoria, Advs. For the R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. Before the first appellate authority a question was raised whether the claim was made under section 36(1)(vii) and the answer was in negative. According to assessee the claim was made under section 28 r.w.s. 30 to 43D of IT Act. However, ld. CIT(A) was of the opinion that the provisions of section 37(1) were to be applied because required to be ascertained whether the expenditure in question was laid out or expended wholly and exclusively for the purpose of business. Ld. CIT(A) has observed that the appellant was not in the business of advancing of loans but in the business of manufacturing Grinding Wheels, Refractories etc. According to him the advances were not a trade debt. He has further opined that the advances were the property of the appellant hence in the shape of capital asset, therefore, by extinguishing its right over a capital asset the assessee has incurred capital loss and not a revenue loss. Before ld. CIT(A) certain case laws were cited for the proposition that the write off of investment could not be treated as a trading loss but the right off of advances could be so treated. The first appellate authority has distinguished those case laws with the facts of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Cal.), CIT v. Gillanders Arbuthnot Co. Ltd. [1982] 138 ITR 763 (Cal.) and CIT v. F.M. Chinoy Co. Ltd. [1969] 74 ITR 780 (Bom.). On the principle of business loss he has cited certain decisions, viz., Ramchandar Shivnarayan v. CIT [1978] 111 ITR 263 (SC), Badridas Daga v. CIT [1958] 34 ITR 10 (SC) and Indore Malwa United Mills Ltd. v. State of MP [1965] 55 ITR 736 (SC). 5. On behalf of the revenue ld. D.R. Shri K.K. Sharma has strongly supported the orders of Assessing Officer and CIT(A) and argued that there was no business necessity of the appellant company and the advances were not in the course of business, therefore, rightly disallowed. He has also argued that a precedent can only be relied if the facts of the particular case are identical. He has also mentioned that the primary rule is that the intention of the Legislature has to be taken into account. For this proposition he has cited a decision of Padmasundara Rao v. State of Tamil Nadu [2002] 255 ITR 147 (SC). 6. We have, carefully considered the submissions of both the sides and also thoroughly perused the orders of the authorities below in the light of the material placed before us as well as the case laws cited herein ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred in above paras. The financial crisis of the subsidiary is also not in dispute rather it had gone into liquidation by the order of the Court. Though the main business of the assessee company is manufacturing grinding wells Silicon Carbide, refractories etc. but the clauses of memorandum has also prescribed to lend money for the purpose of any other business with a view to enter into partnership or any joint venture arrangement. Clause 37 has also authorised the assessee company to establish or promote or concur in establishing or promoting any other company. Due to this financial arrangement it is stated before us that the management of the subsidiary was also controlled by the appellant. No doubt the advance was not in the course of money lending business but definitely in the course of its business. As the financial position of the subsidiary company had gone weak therefore, considering the pros and cons as a businessman the amount was written off. Under the totality of the circumstances and in view of the precedents cited hereinabove the write off of advance to M/s. IPS deserves to be allowed. In respect of other claim of write off of Rs. 3,19,590 to M/s. Siltronics (India) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... two other companies can be allowed also a deduction in computation of assessee's income on the ground that the monies were irrecoverable. Admittedly, the assessee is not engaged in the business of lending money. Further, by assessee's own admission, the claim for deduction was not made under section 36(1)(vii) of the Income-tax Act, 1961. The claim had been made under section 28 of the Income-tax Act, 1961 on the ground that this was a bona fide business loss which had to be allowed as deduction in computation of assessee's income from business. The assessee's contention in this regard has been rejected by the learned CIT(A) for sound reasons and after proper appreciation of facts and law on the point as brought out in paragraphs 9 to 13 of his order. It has been rightly pointed out by the learned CIT(A) that the assessee was not entitled to deduction of the said amount either as bad debts under section 36(1)(vii) or as bona fide business expenditure since the losses incurred by the other two companies could not be considered as expenditure incurred by the assessee for the purpose of earning its profits from business. Deduction was not allowable for these amounts e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 00 per cent export oriented unit. This company was taken over by the appellant by acquiring 61 per cent stake in it on 19-9-1979. Apparently, the said company was facing severe financial crisis and in order to enable it to tide over the Financial crisis, the appellant company advanced interest free unsecured loan to the extent of Rs. 21,88,243 in the year 1979-80. From the very beginning the said amount was appearing in the balance-sheet of the appellant as an asset in the form of Loans and Advances, whereas in the books of the International Power Semi-Conductors Limited, the said amount was appearing as a liability in the form of unsecured loans. 10. As to the second company, viz., Siltronics (India) Ltd. it was incorporated on 1-5-1980 and the appellant company was one of its promoters. The appellant company held 24.5 per cent of the shares of the said company. The appellant used to provide funds to the said company as and when required. As on 31-3-1990, advances made by the appellant to the said company amounted in all to Rs. 3,19,590. 11. Apparently, both the companies could not survive the financial crisis and ultimately, they went into liquidation. During the previous year re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d accordingly, it has to be treated as a capital asset. By writing off the amounts in question, the appellant has extinguished his capital asset and therefore, it constitutes capital loss and not a revenue loss. In this context, it is to be noted that the value of the appellant Shares of the said two companies amounted to Rs. 46.75 lakhs. The said amount of Rs. 46.75 lakhs has also been written off by way of 'investments in shares of companies in liquidation written off'. The write off in respect of the shares of the said two companies has been treated by the appellant as a capital loss whereas the write off in regard to the advances has been treated as trading loss. As it is, investments and advances both constituted capital assets and any write off in respect of the same would constitute capital loss. In this connection, it was clarified by the A.R. that the write off of investments could not be treated as a trading loss but write off in respect of the advances could be so treated in view of following judgments: (i) Essaen (P.) Ltd. v. CIT [1967] 65 ITR 625 (SC) (ii) Indore Malwa United Mills Ltd. v. State of MP [1965] 55 ITR 736 (SC) (iii) Vassanji Sons Co. (P.) Ltd. v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A). The decisions cited and relied upon on behalf of the assessee are of no relevance as pointed out by the learned CIT(A). On facts and in law, the order of the learned CIT(A) disserves to b confirmed and the ground Nos. 3 and 4 raised by the assessee have to be rejected. ORDER UNDER SECTION 255(4) OF THE INCOME-TAX ACT/1961 Since the two Members of the Bench have differed in opinion on grounds 3 and 4, raised in this appeal, we state the following question for reference to Third Member Whether on facts and in law, the assessee was entitled to deduction of Rs. 25,07,833 being advances made to two other companies, in computation of profits of business? The matter is now referred to the Hon'ble President for reference to Third Member. THIRD MEMBER ORDER M.K. Chaturvedi, Vice President- 1. This appeal came before me as a Third Member to express my opinion on the following question: Whether on facts and in law, the assessee was entitled to deduction of Rs. 25,07,833 being advances made to two other companies, in computation of profits of business? 2. I have heard the rival submissions in the light of material placed before me and precedents relied upon. The assessee advanced R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e caption 'Loans and advances'. As per the object clause of the Memorandum, the assessee was entitled to lend money, securities and other properties for the purpose of business. The assessee was also entitled to carry other profitable businesses. It was possible on the part of the assessee to lend money without security upon such terms and conditions as thought fit in the interest of the company. International Power Semi Conductors Ltd. and Siltronics (India) Ltd. were the subsidiaries of the assessee company. The assessee was actively involved in the management of those companies. The money was advanced with a view to revive those companies. Ultimately those companies went into liquidation. Money was given to enable the companies to recover from the financial crisis and also to meet the day-to-day obligation. It was submitted that this is not expenditure but this is a business loss; as such it is allowable under the law while computing the total taxable income. 7. To buttress the point canvassed, reliance was placed on various precedents discussed hereinafter. In Vassanji Sons Co. (P.) Ltd.'s case, the main object of the assessee company was to carry on the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... too remote for the purpose of the allowance as a trading debt. The test and the approach to be applied in this case must be that of a businessman. The amount of advance was held to be deductible as a trading loss for the year in question. In F.M. Chinoy Co. Ltd.'s case, in order to retrieve as much as loss possible to one of its managed companies, the managing agents had to assure and pay Rs. 35,000 as retrenchment claim, under section 25F, to the workers of the managed company going into liquidation. This amount was held to be allowable in the hands of the managing agents. In the case of Turner Morrison, Co. Ltd., the assessee advanced some monies to its subsidiary company and this company was wound up because its assets were purchased by a company wholly owned by the Government of India and the entire amount went to the secured creditors. As a result there was no chance of recovery of the amounts from the subsidiary. The Tribunal disallowed the deduction for bad debt on the ground that the bad debts were shown after the close of the accounting year, and secondly, the assessee was not in the business of money lending. Hon'ble High Court has held that it was immaterial whet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dridas Daga, there was loss due to embezzlement by an employee. The assessee was engaged in the business of money lending. The employee was empowered to operate the bank account. The loss by embezzlement was held to be business expenditure. Hon'ble Supreme Court has held that section 10(2) of the Indian Income-tax Act, 1922, enumerates various items which are admissible as deductions but they are not exhaustive of all allowances which could be made in ascertaining the profits of a business taxable under section 10(1). Profits and gains, which are liable to be taxed under section 10(1), are what are understood to be such under ordinary commercial principles. When a claim is made for a deduction for which there is no specific provision, it can be decided having regard to the accepted commercial practice and trading principles. Accordingly the loss sustained by a business by reason of embezzlement by an employee was held to be an admissible deduction. In deciding this issue the Apex Court approved the principle laid down in the case of Lord's Dairy Farm Ltd. v. CIT [1966] 27 ITR 700 (Bom.). 8. The learned Departmental Representative submitted that the pronouncements relied upo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act, provides for deduction for payment of interest only if the assessee borrows capital for its own business. A subsidiary company is a separate legal entity and the business of the subsidiary company cannot be considered as the business of the assessee itself. Thus the interest on money borrowed by the assessee for advancing to its subsidiary company could not be deducted from the income of the assessee under section 36(1)(iii) of the Act. Similar view was taken by the Hon'ble jurisdictional High Court in the case of Phaltan Sugar Works Ltd. v. CIT [l995] 216 ITR 479 (Bom.). 9. The learned counsel for the assessee submitted that interest under section 36(1)(iii) of the Act was allowed to the assessee in the preceding years; as such the decision of Phaltan Sugar Works Ltd. cannot be applied. Reliance was placed on the decision of the Apex Court rendered in the case of Radhasoami Satsang v. CIT [1992] 193 ITR 321. In this case the Hon'ble Supreme Court has held that strictly speaking, res judicata does not apply to income-tax proceedings. Though, each assessment year being a unit, what was decided in one year might not apply in the following year; where a fundamental ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent years. 12. In the case of Phaltan Sugar Works Ltd., it was made clear that a subsidiary company is a separate legal entity and the business of the subsidiary company cannot be considered as the business of the assessee itself. 13. In the case of CIT v. Motiram Nandram [1940] 8 ITR 132 (PC) it was held that the deposit was not a loan made in the course of carrying on the business of organizing agents or in the course of the business of a money lender. It was exacted by the company as a condition of the assessees being given an agency which they hoped to manage profitably; the purpose of being permitted to engage in such a business must be considered to be a purpose of securing an enduring benefit of a capital nature; and the deposit amount could not, upon a true view of the terms of the agreement and in the circumstances of the case, be regarded as an expenditure made in the course of carrying on an existing agency, or any other business. The loss of the deposit was therefore a loss of capital and could not be deducted from the profits of the business made by the assessees for purposes of income tax. 14. I have considered the various facts. In my opinion, the factum of advancing ..... X X X X Extracts X X X X X X X X Extracts X X X X
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