TMI Blog2010 (7) TMI 671X X X X Extracts X X X X X X X X Extracts X X X X ..... ourse of its business of banking or money lending - The debt arises out of investment activities of the assessee or associated with the capital field, not on account of revenue cannot be allowed as a bad debt - The assessee company neither a banker nor a money lender, the advance made by the assessee as an investment not to be said to be incidental to the trading activity of the assessee and merely money handed over to someone in the capital field and that person failed to return the same, that amount cannot be claimed as deduction as bad debt Regarding write off of the secondment charges and other expenses - These amounts are advanced to subsidiary company for the purpose of incurring the business expenses of the subsidiary companies and the consideration for the sale of the subsidiary company is worked out after considering the amount receivables - it is presumed that the amounts due were already considered while arriving at the sale price of the subsidiary company represents an advance made to the subsidiary company and not an expenditure Regarding irrecoverable amount spent on agronomy and marketing rights - Since the subsidiary company is sold, this amount which is not rea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... package deal to transfer the subsidiary company VST NPL to GGCL for a lump sum consideration. The assessing officer held that the assessee company transferred the shares held in the subsidiary company to M/s GGCL as per the conditions mutually agreed upon. The assessing officer observed that the assessee company sold the shares for a consideration of Rs.15.50 crores and incurred a loss. The assessing officer considered the issue whether the loss is to be computed as a capital loss or loss assessable u/s 45 of the Act. The assessing officer held that the assessee company passed a resolution on 27-5-1999 wherein it was noted that the amount of Rs.38.46 crores owed by the subsidiary company is treated as not payable. The resolution is extracted at page13 of the assessment order. The assessing officer held that in the process of reconstructing the balance sheet as on 31-3-1999 and transferring the subsidiary company the assessee company chose to forego the amount due to them from VST NPL. The assessing officer observed that the loss incurred by the assessee in the process of sale of the transaction is nothing but loss of capital invested in the subsidiary company. The assessing offi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by no stretch of imagination it can be called as transfer of the undertaking or slump sale and disallow the claim of the assessee as capital loss. 5. On the other hand, the learned Departmental Representative submitted that this impugned transaction is nothing but transfer of the undertaking as a whole, as enumerated in the provisions of sec.50B of the Act and it is not only transfer of shares but also transfer of the undertaking itself. By entering into the agreement dt.23-11-1999, the assessee transferred all the assets and liabilities of the subsidiary company (VST NPL) to GGCL. It is nothing but a package deal . The purchaser is not only intended to purchase only the shares but also the undertaking as a whole for which purpose it had entered into an agreement. If the purchaser wanted to purchase the shares alone or to purchase clear company, what is the necessity of this agreement ? She drew support from the judgement in the case of CIT v.Shri B.C.Srinivasa Setty 128 ITR 294 (SC) and submitted that assets transferred cannot be construed as a capital asset within the contemplation of sec.45 and it falls u/s 50B of the I.T.Act. Further, she submitted that there is no material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e scheme of entries to arrive at the balance of assets and liabilities as reflected in the proposed or projected balance sheet of the company as annexed hereto as Annexure III. b) Waiver of all liabilities of the company towards the Principal Seller. c) Waiver of interest on advances due to the principal seller by the company. iii) Valuation- The principal seller shall have provided to the purchaser a valuation report of the fixed assets of the company, conducted and prepared by an independent valuer. iv) Transfer of other assets: The principal seller shall have transferred and conveyed or shall have caused to convey and transfer in the name of the company, all the computers and the car which are being used by the company. v)Fixed assets and Inventory: as on the closing date, the company shall be in possession of such of the fixed assets and the inventory of raw materials, work-in-progress and finished goods, stores and spares, processing and packing materials, as specified in the list of fixed assets and inventory as reflected in the balance sheet of the company as aat the closing date and also as per the schedule of investment in fixed assets. vi) Payment towards liab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the purchaser for a consideration of Rs.15.50 crores by transfer of the shares to GGCL, actually the assessee transferred the entire undertaking i.e. subsidiary company i.e. VST NPL to GGCL. On the transfer of shares, all outstanding liabilities of the transferred company and taxes including without limitation income tax, as stated in clauses III and IV of the impugned agreement dated 23.11.1999, it is not only transfer of shares but transfer of the entire undertaking to GGCL. On consideration of various stipulations and provisions stated therein the agreement, it is clear that the intention of the parties was to sell the subsidiary company i.e., VST NPL to GGCL and purchaser s intention is to purchase the VST NPL for a consolidated price, which is nothing but slump purchase price. The terms of agreement are very specific and clear and there is no need for importing any other meaning. The assets and liabilities of VST NPL were sold together as a group by the agreement cited supra and this sale squarely fell in line with the idea of a slump sale as provided in the provisions of sec.50B of the Act. Further, assessee sold the entire undertaking with all its assets and liabilities t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny as a matter of prudence had, in the financial year 1998-99 relevant to the ay 1999-2000, provided Rs.53 crores towards loss from NPL covering the aggregate of investments, fixed assets and monies advanced but unrecoverable. Such loss was taken as a disallowance in computation of total income as the amounts were mere provisions and not actually written off in the books. In the financial year 1999-2000 (AY 2000-01), the monies due from NPL were actually written off in the books and hence claimed as deduction in computation of total income for that year. This is also evident from the audited accounts for that year where sub-point (ii) of point 22-Notes to Profit and Loss accounts clearly mention that the provisions set up in the previous year i.e. FY 1998-99) under the head contingencies subsidiary were fully adjusted. The advances made to NPL from time to tie in order to help them to meet their cash flow requirements. It is submitted that these payments have to be made by the assessee as at that time NPL could not raise funds from either conventional sources or the financial market and since as a parent company it is our responsibility to ensure the commitments of the subsidia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al institutions were coming forward to lend money to the project, NPL with difficulty managed to get only about Rs.7 crores as long term funding from banks and institutions, during the period when the project was getting delayed and the balance of finances were provided by VST in the form of advances. It is also submitted that VST being the parent company had a responsibility to fund and pay the creditors of the subsidiary. Otherwise not only NPL s creditors would have been affected but also the credibility and financial rating of VST itself would have been affected. During the above period, the financial markets were also undergoing serious downturn and depression and therefore NPL could not raise any moneys from public or through the financial market. Also, since the project had not reached a break-even point, the management did not deem it fit to go for a public issue though this was very much in the plans. In view of the above, it is submitted that the combination of the above factors has necessitated in VST making the advances to NPL,which are therefore clearly in the nature of advances made in the course of carrying on the business, made with commercial necessity and business ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in earlier years written off as irrecoverable and claimed u/s 36(1)(vi)/37(1) Rs.6,50,00,000- it is submitted that the company had spent considerable time and effort in developing the infrastructure and the know-how both on agricultural and marketing aspects of the business including Agronomy for developing suitable varieties of Spices and vegetables that were required by NPL to carry on their business operations. All such expertise and rights were sold as Agronomy and marketing rights to NPL in the previous year relevant to the assessment year 1997-98 for a consideration of Rs.6.50 crores. The resultant capital gains was offered by the assessee to tax in the ay 1997-98, however no part of the above consideration for sale of agronomy and marketing rights could be recovered by the assessee from NPL due to their adverse business circumstances. Therefore, the amount under consideration was written off as not recoverable, during the previous year relevant to the ay 2000-01. It is submitted that the above amount satisfies the requirements of sec. 36(1)(vii) and hence allowable as a bad debt. Further, the amount being non recovery of a business debt, incurred during the course of busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was held that the assessee company had incurred the loss in carrying on is own business which included furnishing guarantees to debts borrowed by its subsidiary companies. The assessee company could have ascertained whether there was loss in the transaction of guarantee only at the stage of final payment by the liquidators, which was received in the relevant previous year 1962-63 and it was allowable in that year. iii) ITC Ltd. v. JCIT 95 TTJ 1017 (Kol), wherein it was held that expenses incurred by assessee company on restructuring the business of a group company (by merger with another company) with a view to protect its brand name associated with that company and its goodwill, was expenditure laid out wholly and exclusively for the purpose of assessee s business and is, therefore, allowable as deduction. iv) DCIT v. Oman International Bank SAOG 100 ITD 285 (SB) (Mum), wherein it was held that after amendment of sec.36(1)(vii) with effect from 1-4-1989, once the assessee written off the debt as bad debt there is no obligation on the part of the assessee to prove that the debt written off is indeed a bad debt for the purpose of allowance under sec.36(1)(vii). 10. On the other h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessees engaged in business and profession. This cannot be the intention of the Act. Further, she relied on the order of the Tribunal in the case of D.C.M. Ltd.,v. DCIT, 123 TTJ 114 (Del) for the proposition that when the assessee is not in the business of advancing the loan, the money advanced to its subsidiary is not in line with the normal business activities of the assessee. Therefore, the loan given to subsidiaries is not connected to the business of the assessee. Thus, the amount of loan given to a subsidiary cannot be termed as money advanced during the course of normal business activity of assessee and thereafter when there was no recovery and loss of that amount, is nothing but loss of capital and the claim of the assessee of that amount as a deduction cannot be business loss u/s 28 read with sec. 37. Further, she relied upon the judgement of the Bombay High Court in the case of Salem Mangnesite Pvt.Ltd. v. CIT 180 Taxman 545 (Bom) for the proposition that the assessee which is solely in the business of mining, had lent certain amount to its wholly owned subsidiary company for construction of a jetty, subsequently, subsidiary company suffered a loss and was not in a posit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r which the bad debt is claimed. As stated earlier, to claim deduction as a bad debt, it should not be too remote from the business carried on by the assessee and if the debt or guarantee given by the company while carrying on the business other than finance to the subsidiary company, it is not given in the course of assessee s business as there is no privity of the contract or any legal relationship between the assessee and such subsidiary company as trade debtor and creditor. There is neither any custom nor any statutory provision or any contractual obligation under which the assessee was bound to advance loan to the subsidiary company. Hence, the amount that had to be lost or incurred on account of subsidiary company cannot be claimed as bad debt when it became irrecoverable. In order to be deductible as a business loss, it must be in the nature of trading loss, not as capital loss springing directly out of trading activity and it must be incidental to the business of the assessee and it is not sufficient that it falls on the assessee in some other capacity or is merely connected with its business. Because the assessee bore the loss of the subsidiary company on account of failur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed as a bad debt. The assessee company neither a banker nor a money lender, the advance made by the assessee as an investment not to be said to be incidental to the trading activity of the assessee and merely money handed over to someone in the capital field and that person failed to return the same, that amount cannot be claimed as deduction as bad debt. Accordingly, money advanced to subsidiary company cannot be allowed as deduction either u/s 36(2) or u/s 37(1) on writing off the same. The Hon ble Supreme Court in the case of A.V. Thomas Company Ltd. Vs. CIT (48 ITR 67) (SC) it was held that when the assessee is neither a banker nor a money lender, the advance made by assessee to a private company to purchase a share could not be said to be incidental to the trading activity of the assessee. In the case of B.D. Bharucha Vs. CIT (1967) 65 ITR 403 (SC) it was held that if an advance made in the ordinary course of business of the assessee as a part of the business activity that debt emerges from that activity can be allowed as a bad debt and treated as a revenue loss. If the amount was incurred for ensuring any investment which is very source of his business and that advance is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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