TMI Blog2007 (2) TMI 276X X X X Extracts X X X X X X X X Extracts X X X X ..... e Act. The other component of the assessee's claim as a 'business loss', or alternatively, as a revenue expenditure u/s 37(1), claimed in AY 2001-02 and in AY 2002-03. It represents payments made by the assessee company and its associates to Indocan as ICDs because Indocan was in financial difficulties. The operations of the business of the assessee company are mentioned. Therefore, we have to hold that the payments of ICDs to Indocan had neither a direct and proximate nexus with, nor was it incidental to, the carrying on of the operations of the business of the assessee company as mentioned. Admittedly, it is not the business of the assessee company to make deposits as ICDs. We, therefore, hold that the claim can neither be allowed as a 'business loss' nor as a revenue expenditure u/s 37(1) of the Act. The nexus must be 'direct and proximate' and it should be with the 'carrying on of the operations of the business'. In the present case such a 'direct and proximate nexus' between the impugned payments aggregating sum and the 'carrying on the operations of the business' of the assessee company is totally absent as can be seen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... count of lead manager fee of Rs. 75,000 and SEBI and PSE registration fee of Rs. 20,000 is allowable expenditure and be allowed in full. Without prejudice it further be held that deduction be allowed and in alternative the deduction be allowed on the basis of decision of the AO, just and proper relief be granted to the appellant in this respect. 4. In para 4 of his order, the AO invoked the provisions of s. 35D in respect of the expenses aggregating to Rs. 1.10,080 as under: (Rs) (i) Share transfer expenses 15,080 (ii) Lead manager's fees 75,000 (iii) SEBI PSE registration fees 20,000 Total 1,10,080 5. The CIT(A) allowed the assessee's claim in respect of Rs. 15,080, saying that it was admissible as revenue expenditure. However, about the balance amount of Rs. 95,000 (Rs. 75,000 + 20,000), he directed that the deduction to the extent of 1/5th allowed by the AO under s. 35D be withdrawn. In other words, the CIT(A) enhanced the assessment to the extent stated above. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... major shareholders of M/s Indocan Engineering systems Ltd (Indocan) on 29th Aug., 1997. This agreement provided for acquisition of 60 per cent of the paid up capital of Indocan by ASL during the financial year 1997-98. The acquisition price was arrived at Rs. 2.99 crores being full value of 60 per cent equity shares of Indocan. The shares held by Shri A. Parmeshwaran and his family representing about 18 per cent of the paid up capital of Indocan were allotted to the assessee-company The balance of the shares were held by a Canadian company, M/s Peekay Holdings Ltd. 9.1 Further, the assessee company decided to place Rs. 2.22. crores by way of inter-corporate deposits (ICDs) with Indocan, out of which 1 crore was invested from out of the assessee's funds and the balance was paid by way of loan by the group companies of the assessee. The funds made available by the group companies carried interest @ 18 per cent and were returnable within 3 months. The assessee company had given a guarantee that if Indocan defaulted in returning the money to the group of companies, in that case it would be liable to pay the principal amount along with interest. 9.2 The assessee company appoin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... isposal of Indocan partly by way of purchase of shares and partly by way of ICDs. - that shortly thereafter, sometimes in October, 1997, it was noticed from the balance sheet of Indocan for financial year 1996-97 that it had accumulated substantial losses/liabilities. - that a number of steps were taken to recover the ICDs from Indocan. - that the arbitration award was passed on 18th Oct., 2001 but no recovery could be made. - that the appellant company claimed before the AO and the CIT(A) that the purchase of shares of Indocan and placement of ICDs with Indocan were for the purposes of the business of the assessee company. - that the above loss was allowable as business loss under s. 28 or alternatively as revenue expenditure under s. 37 of the Act. - that reliance was placed on the decisions in the following cases: (i) CIT vs. Investa Industrial Corporation Ltd. (1979) 119 ITR 380 (Bom); (ii) IBM World Trade Corporation vs. CIT (1990) 186 ITR 412 (Bom); (iii) CIT vs. Anjani Kumar Co. Ltd. (2002) 178 CTR (Raj) 423 : (2003) 259 ITR 114 (Raj); (iv) CIT vs. Bombay Dyeing Manufacturing Co. Ltd. (1996) 132 CTR (SC) 217 : (1996) 219 ITR 521 (SC); (v) S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Supreme Court in the following three cases: (i) Ramchandar Shivnarayan vs. CIT 1978 CTR (SC) 5 : (1978) 111 ITR 263 (SC); (ii) CIT vs. Mysore Sugar Co. Ltd. (1962) 46 ITR 649 (SC); (iii) CIT vs. Motiram Nandram (1940) 8 ITR 132 (PC). 15. In the case of Ramchandar Shivnarayan, the Supreme Court summed up the principles as under: The principle applicable in India is more or less the same. 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. It is in that sense that from a commercial standard such a loss is considered to be a trading one and becomes deductible from the total income, although in terms neither in the 1922 Act nor in the 1961 Act, there is a provision like s. 51(1) of the Australian Act. 16. In the case of Mysore Sugar Co. Ltd., the Supreme Court laid down the test as under: To find out whether an expenditure is on the capital account or on revenue, one must consider the expenditure in relation to the business. Since all payments reduce capital in the ulti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erived income from the investment in Government securities. In years, both preceding and succeeding the relevant accounting year, the assessee had sold some 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 appellant's business and committed theft of Rs. 30,000. In spite of logding a compliant with the police the amount could not be recovered. The appellant 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 CIT, the High Court held that the loss was not allowable as a deduction as the loss was not incidental to the appellant's business. 20. The Supreme Court, reversing the decision of the High Court, held that the loss of Rs. 30,000 was directly connected with the business operation and was incidental to the carryin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tative at S. No. (d), of his written submission, is of the Supreme Court in the case of Bombay Dyeing and Manufacturing Co. Ltd. In that case an amount of Rs. 2,25,000 was contributed by the assessee to the Maharashtra Housing Board towards construction of tenements for the company's workers. The tenements remained the property and the assets of the housing board. The Tribunal gave a finding that the expenditure was incurred merely with a view to carrying on the business of the assessee company more efficiently by having a contended labour force. In the light of the findings recorded by the Tribunal, the Court held that the amount constituted revenue expenditure. 24. The learned CIT(A) in his written submission has placed reliance, inter alia, on the decision of Bombay High Court in the case of Indequip Ltd. In this case the assessee company carried on the business as dealers and suppliers of mill gin stores and clothes. In the course of its business the assessee used to sell coal, glue products, Burmashell wires and allied products to various textile mills including one M/s Manikchowk and Ahmedabad Manufacturing Co. Ltd. of Ahmedabad. It was one of biggest purchasers of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oning of projects of different types and sizes of combustion and thermal engineering products such as flare systems, burners, furnaces, industrial/hospital waste incinerators, crematoriums, laddle heating systems, etc., The manufacturing of electromechanical assemblies is done as per the technical specification given by the customers. 27. The MOU dt. 6th July, 1997 entered into between the assessee company and Indocan stated, inter alia, as under: - that a strategic alliance between the two organizations would be of mutual interest. - that ASL (the assessee company) was interested to acquire a controlling interest upto 60 per cent of equity of Indocan during the year 1997-98. - that after such an equity transfer the management control of Indocan will shift to ASL. 28. The paid up share capital of Indocan as on 31st March, 1997 was Rs. 1,72,50,000, consisting of 1,72,500 equity shares of Rs. 100 each, out of which 70 per cent equity shares were held by M/s Peekay Holdings Ltd., a company incorporated in Canada and 12 per cent equity shares were held by Shri A. Parameshwaran and his family. Shri Paul Khurana (an inhabitant of Canada) was in control of M/s Peekay Holdin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tails of the total claim made by the assessee, in respect of the write off, in asst. yrs. 2001-02 and 2002-03, are as under: Asst. yr. Particulars Amount (Rs.) 2001-02 Shares 76,68,000 ICDs 1,45,36,548 Total 2,22,04,548 2002-03 ICDs 75,00,000 Total 2,97,04,548 32. The claim of Rs. 2,22,04,548 made in asst. yr. 2001-02 has two components. One component of Rs. 1,45,36,548 represents ICDs placed with Indocan by the assessee company and its associates, and interest thereon. The. other component of Rs. 76,68,000 represents payments made to the shareholders of Indocan for purchase of equity shares as under: S. No. Number of shares Name of shareholder (transferor) 1 1,500 Ms. Rekha Parameshwaran 5,600 2. 1,900 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve, which represents the payments made to the shareholders for acquiring the shares of Indocan. We fail to see the rationale behind this claim. Manifestly, it cannot be said that this payment had any direct and proximate nexus with, or that it was incidental to, the carrying on of the operations of the business of the assessee company as mentioned in para 26 above. We fail to comprehend as to how the payments made to the promoters for buying the shares of Indocan could be claimed as a revenue expenditure under s. 37(1). We, therefore, hold that the claim can neither be allowed as a 'business loss' nor as a revenue expenditure under s. 37(1) of the Act. 36. The other component of the assessee's claim as a 'business loss', or alternatively, as a revenue expenditure under s. 37(1), as mentioned in paras 30 and 31 above, is for Rs. 2,20,36,548 out of which Rs. 1,45,36,548 were claimed in asst. yr. 2001-02 and Rs. 75,00,000 were claimed in asst. yr. 2002-03. It represents payments made by the assessee company and its associates to Indocan as ICDs because Indocan was in financial difficulties. The operations of the business of the assessee company are mentioned in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... developed by M/s Avam Soft for financial accounting, material accounting as well as payroll. It was contended by the learned Authorised Representative that the expenditure was incurred in the ordinary course of the assessee's business and was allowable as revenue expenditure. The AO treated it as capital expenditure and his action was confirmed by the CIT(A). 41. We find that the Rajasthan High Court in the case of CIT vs. Arawali Constructions Co. (P) Ltd., (2002) 177 CTR (Raj) 79 : (2003) 259 ITR 30 (Raj) held that the expenditure on acquiring computer software was to be treated as expenditure of capital nature. The Court observed as under: The facts on record are that the payment of Rs. 1,38,360 was not paid for consultancy fee to Hindustan Computers Ltd., in fact, the payment was made for outright sale of 'computer software' which is used as technique in mining operations. The finding of the CIT(A) is that the acquisition of software cannot be treated to be an asset of endurable nature. If the programme is used in one mining to another mining operation why it should not be treated as a capital asset and expenditure on that is capital expenditure. Considering ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the lower authorities was based on mere conjectures and surmises. Further, the assessee is a company and therefore, there could be no justification for an ad hoc disallowance on the ground of personal or non-business component in the expenses claimed. In taking this view we are fortified by the decision of the Gujarat High Court in the case of Sayaji Iron Engg. Co. vs. CIT (2002) 172 CTR (Guj) 339 : (2002) 253 ITR 749 (Guj). The Court observed as under: .... The assessee which is a private limited company is a distinct assessable entity as per the definition of 'person' under s. 2(31) of the Act. Therefore, it cannot be stated that when the vehicles are used by the directors, 'even if they are personally used by the directors' the vehicles are used by the 'personal use'. The limited company is an inanimate person and there cannot be anything personal about such an entity. The view that we are adopting is supported by the provision of s. 40(c) and s. 40A(5) of the Act. 47. We, respectfully, follow the precedent and allow the ground No. 4. Ground No. 5 On the facts and circumstances prevailing in the case and as per provisions of law, it be he ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d just and proper relief in this respect. 50. It was submitted by the learned Authorised Representative that this issue was raised before the CIT(A) through an additional ground as mentioned by the CIT(A) in para 4 of his order, but the CIT(A) omitted to decide it. In the circumstances, therefore, we remit this matter back to the file of CIT(A) with a direction that he should decide this issue after giving adequate opportunity of being heard to the assessee. The ground No. 7 is decided accordingly. 51. In the result, the appeal filed by the assessee for asst. yr. 2001-02 is partly allowed. ITA No. 588/Pn/2006 : Asst. yr. 2002-03 Ground No. 1 On facts and circumstances prevailing in the case and as per provisions of law, it be held that the write off of Rs. 75,00,000 should have been allowed in full. It should further be held that amount written off was provided by the appellant company for the business purpose and out of business expediency and claim is allowable under s. 37 and/or s. 28 of the IT Act. Just and proper relief be granted to the appellant in this respect. 52. The total claim made by the assessee, in respect of the write off, in asst. yrs. 2001-02 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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